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 September 30, 2003

     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 period that the  registrant was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. YES  X   NO    .
                                       ---     ---

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

         As of  November  3, 2003 there were  issued and  outstanding  6,485,877
shares of the registrant's Common Stock, par value $.10 per share.

<PAGE>

                    FMS FINANCIAL CORPORATION AND SUBSIDIARY

                          QUARTERLY REPORT ON FORM 10-Q

                               SEPTEMBER 30, 2003

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                       Page
                                                                                       ----
<S>                                                                              <C>
PART I - Financial Information

         Item 1 - Financial Statements
               Consolidated Statements of Financial Condition as of
                           September 30, 2003 (unaudited) and December 31, 2002..........1

                  Consolidated  Statements  of  Operations  (unaudited)  for the
                           three and nine months  ended  September  30, 2003 and
                           September 30, 2002............................................2

                  Consolidated Statements of Cash Flows (unaudited) for the nine
                           months ended  September  30, 2003 and  September  30,
                           2002..........................................................3

                  Consolidated Statements of Changes in Stockholders' Equity
                           (unaudited) for the nine months ended September 30, 2003
                           and September 30, 2002........................................4

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

         Item 2 - Management's Discussion and Analysis of
                           Financial Condition and Results of Operations..............7-19

         Item 3 - Quantitative and Qualitative Disclosure about Market Risk.............19

         Item 4 - Controls and Procedures...............................................19

PART II - Other Information

         Item 1 - Legal Proceedings.....................................................20

         Item 2 - Changes in 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 and Reports on Form 8-K......................................20
</TABLE>

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                                         September 30, 2003  December 31, 2002
------------------------------------------------------------------------------------------------------------------------------
                                                                                               (Unaudited)
<S>                                                                                       <C>                <C>
ASSETS
------
        Cash and due from depository institutions                                           $    35,970,683    $    41,497,691
        Interest-bearing deposits                                                                    25,928             12,252
        Short term funds                                                                         31,445,401         46,900,403
                                                                                            ---------------    ---------------
               Total cash and cash equivalents                                                   67,442,012         88,410,346
        Investment securities held to maturity                                                  216,468,687        164,227,126
        Investment securities available for sale                                                139,346,990        118,612,961
        Loans, net                                                                              395,076,833        361,674,400
        Mortgage-backed securities held to maturity                                             323,629,918        342,122,678
        Accrued interest receivable:
               Loans                                                                              1,581,269          1,560,272
               Mortgage-backed securities                                                         1,921,216          2,175,776
               Investments                                                                        1,483,586          1,543,610
        Federal Home Loan Bank stock                                                             11,834,620         12,061,720
        Real estate held for development, net                                                             0             87,926
        Real estate owned, net                                                                      397,353            291,200
        Premises and equipment, net                                                              30,895,325         29,092,970
        Deferred income taxes                                                                     2,245,813          2,972,572
        Prepaid expenses and other assets                                                         1,291,762          1,005,822
        Trust Capital securities issue costs, net                                                   659,616            717,999
        Excess of cost over fair value of assets acquired                                         1,183,642                  0
                                                                                            ---------------    ---------------
TOTAL ASSETS                                                                                $ 1,195,458,642    $ 1,126,557,378
                                                                                            ===============    ===============

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

Liabilities:
        Deposits                                                                            $   866,651,239    $   800,340,222
        Securities sold under agreements to repurchase                                          225,000,000        225,000,000
        Advances from the Federal Home Loan Bank                                                 11,191,047         11,232,103
        Trust Capital securities - FMS Statutory Trust 1                                         25,000,000         25,000,000
        Advances by borrowers for taxes and insurance                                             2,192,382          2,049,813
        Accrued interest payable                                                                  1,303,628          1,383,054
        Dividends payable                                                                           194,576            193,914
        Other liabilities                                                                         3,162,613          3,720,453
                                                                                            ---------------    ---------------
        Total liabilities                                                                     1,134,695,485      1,068,919,559
                                                                                            ---------------    ---------------
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 7,975,059 and 7,949,809 and shares outstanding 6,485,877
               and 6,463,811 as of September 30, 2003 and December 31, 2002, respectively           797,506            794,981
        Paid-in capital in excess of par                                                          8,507,333          8,279,525
        Accumulated comprehensive income - net of deferred income taxes                             702,163          1,216,053
        Retained earnings                                                                        61,691,154         58,233,840
        Less:  Treasury stock (1,489,182 and 1,485,998 shares, at cost, as of
               September 30, 2003 and December 31, 2002, respectively)                          (10,934,999)       (10,886,580)
                                                                                            ---------------    ---------------
Total stockholders' equity                                                                       60,763,157         57,637,819
                                                                                            ---------------    ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                  $ 1,195,458,642    $ 1,126,557,378
                                                                                            ===============    ===============
</TABLE>

See notes to consolidated financial statements.

                                       1
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                   Three Months ended              Nine Months ended
                                                                      September 30,                  September 30,
                                                              ----------------------------    ----------------------------
                                                                  2003            2002            2003            2002
                                                              ------------    ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>             <C>
INTEREST  INCOME:
Interest income on:
  Loans                                                       $  6,023,654    $  6,425,228    $ 18,308,107    $ 19,167,561
  Mortgage-backed securities                                     3,508,199       4,782,173      11,814,678      13,616,436
  Investments                                                    2,135,917       3,302,760       7,414,628      10,876,691
                                                              ------------    ------------    ------------    ------------
Total interest income                                           11,667,770      14,510,161      37,537,413      43,660,688
                                                              ------------    ------------    ------------    ------------
INTEREST EXPENSE:
Interest expense on:
  Deposits                                                       1,917,653       3,354,425       6,755,394      10,849,964
  Long term debt                                                   314,282         445,773         973,424       1,379,855
  Borrowings                                                     2,386,311       2,314,864       7,093,661       6,667,182
                                                              ------------    ------------    ------------    ------------
Total interest expense                                           4,618,246       6,115,062      14,822,479      18,897,001
                                                              ------------    ------------    ------------    ------------

NET INTEREST INCOME                                              7,049,524       8,395,099      22,714,934      24,763,687
PROVISION FOR LOAN LOSSES                                           75,000          60,000         195,000          89,000
                                                              ------------    ------------    ------------    ------------
NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                              6,974,524       8,335,099      22,519,934      24,674,687
                                                              ------------    ------------    ------------    ------------
OTHER INCOME (EXPENSE):
  Loan service charges and other fees                               19,566          31,389          63,300          84,052
  Gain on sale of real estate held for development, net                  0               0         600,780               0
  Gain on sale of loans                                                232             330             283             793
  Gain on sale of investment securities, net                        63,103               0         285,846               0
  Gain (Loss) on disposal of fixed assets                                0             654        (141,151)        100,767
  Real estate owned operations, net                                 (4,265)        (11,515)         16,940         (27,383)
  Service charges on accounts                                    1,159,714       1,034,639       3,415,956       2,896,817
  Other income                                                      33,566          75,066         103,031         226,535
                                                              ------------    ------------    ------------    ------------
Total other income                                               1,271,916       1,130,563       4,344,985       3,281,581
                                                              ------------    ------------    ------------    ------------
OPERATING EXPENSES:
  Salaries and employee benefits                                 3,876,483       3,473,344      11,607,680      10,331,745
  Occupancy and equipment                                        1,384,007       1,145,015       4,072,723       3,365,259
  Purchased services                                               744,658         650,496       2,142,416       1,914,435
  Federal deposit insurance premiums                                32,466          30,655          96,048          92,779
  Professional fees                                                157,366         224,439         498,785         628,475
  Advertising                                                      112,879         115,737         345,735         320,320
  Other                                                            450,273         467,868       1,440,945       1,164,085
                                                              ------------    ------------    ------------    ------------
Total operating expenses                                         6,758,132       6,107,554      20,204,332      17,817,098
                                                              ------------    ------------    ------------    ------------
INCOME BEFORE INCOME TAXES                                       1,488,308       3,358,108       6,660,587      10,139,170

INCOME TAXES                                                       587,873       1,274,405       2,620,257       3,665,607
                                                              ------------    ------------    ------------    ------------
NET INCOME before extraodinary loss                           $    900,435    $  2,083,703    $  4,040,330    $  6,473,563
                                                              ============    ============    ============    ============
EXTRAORDINARY LOSS (Net of $ 81,394 tax benefit)                         0        (133,682)              0        (133,682)
                                                              ------------    ------------    ------------    ------------
NET INCOME                                                    $    900,435    $  1,950,021    $  4,040,330    $  6,339,881
                                                              ============    ============    ============    ============
BASIC EARNINGS PER COMMON SHARE before extraordinary loss     $       0.14    $       0.32    $       0.62    $       0.98
                                                              ============    ============    ============    ============
DILUTED EARNINGS PER COMMON SHARE before extraordinary loss   $       0.14    $       0.32    $       0.62    $       0.98
                                                              ============    ============    ============    ============
Extraodinary Loss per Common share Basic                      $       0.00    $      (0.02)   $       0.00    $      (0.02)
                                                              ============    ============    ============    ============
Extraodinary Loss per Common share Diluted                    $       0.00    $      (0.02)   $       0.00    $      (0.02)
                                                              ============    ============    ============    ============
BASIC EARNINGS PER COMMON SHARE                               $       0.14    $       0.30    $       0.62    $       0.96
                                                              ============    ============    ============    ============
DILUTED EARNINGS PER COMMON SHARE                             $       0.14    $       0.30    $       0.62    $       0.96
                                                              ============    ============    ============    ============
Dividends declared per common share                           $       0.03    $       0.03    $       0.09    $       0.09
                                                              ============    ============    ============    ============
Weighted average common shares outstanding                       6,484,466       6,463,811       6,473,959       6,576,481
Potential dilutive effect of the exercise of stock options          36,009          29,450          36,420          23,792
                                                              ------------    ------------    ------------    ------------
Adjusted weighted average common shares outstanding              6,520,475       6,493,261       6,510,379       6,600,273
                                                              ============    ============    ============    ============
</TABLE>
See notes to consolidated financial statements.

                                       2
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                           Nine Months ended
                                                                                             September 30,
                                                                                    ------------------------------
                                                                                         2003             2002
                                                                                    -------------    -------------
<S>                                                                               <C>              <C>
OPERATING ACTIVITIES:
Net income                                                                          $   4,040,330    $   6,339,881
Adjustments to reconcile net income to net cash provided
   by operating activities:
Provision for loan losses                                                                 195,000           89,000
Amortization and depreciation                                                           7,548,803        3,599,560
Realized (gains) and losses on:
  Sale of loans                                                                              (283)            (793)
  Disposal and sale of fixed assets                                                       141,151         (100,767)
  Loss on retirement of debt                                                                    0          133,682
  Sale of investment securities                                                          (285,846)               0
  Sale of real estate owned                                                               (33,432)               0
  Sale of real estate held for development, net                                          (600,780)               0
Decrease (Increase) in accrued interest receivable                                        293,587         (495,792)
(Increase) Decrease in prepaid expenses and other assets                                 (285,940)         557,517
Decrease in accrued interest payable                                                      (79,426)        (431,724)
(Decrease) Increase in other liabilities                                                 (557,840)          81,706
Provision (Benefit) for deferred income taxes                                           1,068,497         (937,639)
                                                                                    -------------    -------------
   Net cash provided by operating activities                                           11,443,821        8,834,631
                                                                                    -------------    -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
  Education loans                                                                          98,685          190,697
  Real estate held for development                                                        688,706                0
  Real estate owned                                                                       332,877           12,920
  Property and equipment                                                                  148,619          214,310
Principal collected and proceeds from maturities of investment securities held to
maturity                                                                              178,121,234      157,051,095
Proceeds from maturities of investment securities available for sale                  108,485,625       34,566,341
Principal collected on mortgage-backed securities held to maturity                    168,304,986       76,948,183
Principal collected on loans, net                                                     107,109,449       62,462,942
Loans originated or acquired, net                                                    (141,250,672)     (87,081,309)
Purchase of investment securities and mortgage-backed securities held to
maturity                                                                             (385,731,684)    (225,240,989)
Purchase of investment securities and mortgage-backed securities available
for sale                                                                             (131,343,250)    (116,843,528)
Redemption (Purchase) of Federal Home Loan Bank stock                                     227,100       (2,498,100)
Purchase of office property and equipment                                              (3,615,921)      (2,616,888)
Cash received from deposit purchase, net                                                16,539,246                0
                                                                                    -------------    -------------
  Net cash used by investing activities                                               (81,885,000)    (102,834,326)
                                                                                    -------------    -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                                   57,996,689       62,548,477
Net decrease in time deposits                                                          (8,224,918)     (25,947,128)
Net (decrease) increase in FHLB advances                                                  (41,056)       9,961,790
Proceeds from securities sold under agreement to repurchase                                     0       40,000,000
Net proceeds from issuance of trust capital securities                                          0       24,221,532
Repayment of subordinated debentures                                                            0      (10,100,000)
Increase (Decrease) in advances from borrowers for taxes and insurance                    142,569          (80,004)
Purchase of treasury stock                                                                (48,419)      (2,813,136)
Dividends paid on common stock                                                           (582,353)        (596,424)
Net proceeds from issuance of common stock                                                230,333            1,195
                                                                                    -------------    -------------
  Net cash provided by financing activities                                            49,472,845       97,196,302
                                                                                    -------------    -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                      (20,968,334)       3,196,607
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                         88,410,346       63,359,124
                                                                                    -------------    -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                            $  67,442,012    $  66,555,731
                                                                                    =============    =============
Supplemental Disclosures:
  Cash paid for:
   Interest on deposits, advances, and other borrowings                             $  14,901,905    $  19,328,725
   Income taxes                                                                         2,255,500        4,729,982
  Non-cash investing and financing activities:
   Dividends declared and not paid at quarter end                                         194,578          193,914
   Non-monetary transfers from loans to real estate owned
     through foreclosure                                                                  405,598           76,797
   Investments purchased and not yet settled                                                    0       33,195,000

</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, 2001            6,717,705   $794,888  $ 8,278,423    $  147,496    $51,055,818  $(8,073,444) $52,203,181
Net Income                                                                          6,339,881                 6,339,881
Other comprehensive income
  Unrealized gain on
    securities available
    for sale, net of taxes
    of $719,299                                                      1,081,649                                1,081,649
                                                                                                            -----------
Total comprehensive income                                                                                    7,421,530
                                                                                                            -----------

Dividends declared ($.09)                                                            (592,454)                 (592,454)

Exercise of stock options            925         93        1,102                                                  1,195
Purchase of common stock        (254,819)                                                       (2,813,136)  (2,813,136)

-----------------------------------------------------------------------------------------------------------------------
Balances at
  September 30, 2002           6,463,811   $794,981  $ 8,279,525    $1,229,145    $56,803,245 $(10,886,580) $56,220,316
-----------------------------------------------------------------------------------------------------------------------

Balances at
  December 31, 2002            6,463,811   $794,981  $ 8,279,525    $1,216,053    $58,233,840 $(10,886,580) $57,637,819
Net Income                                                                          4,040,330                 4,040,330

Other comprehensive income
  Unrealized loss on
    securities available
    for sale, net of taxes
    of $341,738 and
    reclassification
    adjustment of $285,846                                            (513,890)                                (513,890)
                                                                                                            -----------
Total comprehensive income                                                                                    3,526,440
                                                                                                            -----------

Dividends declared ($.09)                                                            (583,016)                 (583,016)
Exercise of stock options         25,250      2,525      227,808                                                230,333
Purchase of common stock          (3,184)                                                          (48,419)     (48,419)

------------------------------------------------------------------------------------------------------------------------
Balances at
  September 30, 2003           6,485,877   $797,506  $ 8,507,333    $  702,163    $61,691,154 $(10,934,999)  $60,763,157
------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.

                                       4
<PAGE>


FMS  FINANCIAL  CORPORATION  AND  SUBSIDIARY  NOTES  TO  CONSOLIDATED  FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (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
nine months  ended  September  30, 2003 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, 2002. The consolidated  financial statements include
the Corporation's principle subsidiary, Farmers & Mechanics Bank ("the Bank").

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 nine  months  ended
September 30, 2003.

2-DEPOSITS
On March 28, 2003, the Bank purchased the deposits of the Florence branch of Sun
National Bank totaling $17.9 million.

3-LONG-TERM DEBT
Long-Term  Debt at September  30, 2003 and December 31, 2002  consisted of $25.0
million of Trust Capital Securities. The interest rate resets every three months
to LIBOR plus 360 basis points and will not exceed 11.00% through the first five
years from its  issuance.  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.

4-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered  "well  capitalized"  by OTS regulations at September 30,
2003. The Bank's regulatory  tangible and tier 1 (core) capital ratios are $74.0
million or 6.21% of total bank assets and $77.9 million or 16.73% for risk-based
capital. FMS's consolidated capital ratio at September 30, 2003 totaled 5.08%.

5-SUBSEQUENT EVENTS
On October 24, 2003, the Bank purchased $22.3 million of deposits,  $2.3 million
of consumer loans and the banking facility,  including certain  equipment,  from
Sovereign Bank's Tabernacle branch.  Farmers & Mechanics Bank moved its existing
Tabernacle Branch operations to this new location.

                                       5
<PAGE>

5-RECENTLY ISSUED ACCOUNTING STANDARDS
In January  2003,  the FASB issued FIN 46,  "Consolidated  of Variable  Interest
Entities".  This interpretation  provides guidance on how to identify a variable
interest  entity and  determine  when such an entity  needs to be  included in a
company's  consolidated  financial  statement.  The  Corporation  does  not have
interest  in  any  variable   interest   entities.   The   provisions   of  this
interpretation  became effective in January 2003. The adoption of FIN 46 did not
have a material effect on the Consolidated  Statements of Financial Condition or
the Consolidated Statements of Operations.

In April 2003, the Financial  Accounting Standards Board (FASB) issued Statement
of Financial  Accounting Standards (SFAS) No. 149 "Amendment of Statement 133 on
Derivative  Instruments  and  Hedging  Activities".  SFAS  No.  149  amends  and
clarifies  financial   accounting  and  reporting  for  derivative   instruments
including  derivative  instruments  embedded  in other  contracts  (collectively
referred  to as  derivatives)  and for  hedging  activities  under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities".  SFAS No. 149 is
effective  for  contracts  entered  into or modified  after June 30,  2003.  The
adoption of this  standard  did not have a material  effect on the  Consolidated
Statements  of Financial  Condition or  Consolidated  Statements  of  Operations
because the Corporation generally does not engage in derivative activities.

In May 2003, the FASB issued SFAS No. 150,  "Accounting for Certain  Instruments
with  Characteristics  of  Both  Liabilities  and  Equity",   which  establishes
standards  for  how  an  issuer   classifies  and  measures  certain   financial
instruments with  characteristics  of both liabilities and equity.  SFAS No. 150
requires  that an issuer  classify  a  financial  instrument  that is within its
scope,  which may have previously been reported as equity, as a liability (or an
asset  in  some  circumstances.)  This  statement  is  effective  for  financial
instruments  entered  into or modified  after May 31,  2003,  and  otherwise  is
effective at the beginning of the first interim period  beginning after June 15,
2003.  In October 2003,  the FASB  deferred the  provision  related to mandatory
redeemable  non-controlling interests until further notice. The adoption of this
standard  did not have a  material  effect  on the  Consolidated  Statements  of
Financial Condition or Consolidated Statements of Operations.

                                       6
<PAGE>

ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003.
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.

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

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

                                       7
<PAGE>

FINANCIAL CONDITION

Total  Assets - at September  30, 2003 were $1.2 billion as compared  with total
assets at December 31, 2002 of $1.1 billion.

Short Term Funds - decreased  $15.5  million to $31.4  million at September  30,
2003 from $46.9  million at December  31,  2002.  The  decrease is the result of
purchases of investment securities.

Investment  Securities  Held to  Maturity -  increased  $52.3  million to $216.5
million at September 30, 2003 from $164.2 million at December 31, 2002 primarily
due to  purchases  of $192.2  million  in  collateralized  mortgage  obligations
(CMO's), $35.0 million in U.S. Agency Notes and $3.4 million in Municipal Bonds,
partially offset by principal  paydowns of $141.0 million in CMO's, the maturity
of $15.9 million in Municipal  Bonds and calls of $21.1  million in U.S.  Agency
Notes during the period. Investment securities held to maturity at September 30,
2003 consisted of $14.7 million in adjustable rate securities and $201.8 million
in fixed rate securities.  A comparison of cost and approximate market values of
investment securities held to maturity as of September 30, 2003 and December 31,
2002 follows:

<TABLE>
<CAPTION>
                                      September 30, 2003                      December 31, 2002
-----------------------------------------------------------------------  ---------------------------
                                     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. Agency Notes     $ 39,628,472 $  706,573  $        0  $ 40,335,045  $ 25,914,918   $ 26,547,362
CMO's                  174,809,675    858,509    (849,887)  174,818,297   123,809,139    124,545,227
Municipal bonds          2,030,540      6,284                 2,036,824    14,503,069     14,509,921
                      -------------------------------------------------  ---------------------------
Total                 $216,468,687 $1,571,366  $ (849,887) $217,190,166  $164,227,126   $165,602,510
=======================================================================  ===========================
</TABLE>

Investment  Securities  Available  for Sale - increased  $20.7 million to $139.3
million at September  30, 2003 from $118.6  million at December  31,  2002.  The
increase  is the  result  of  purchases  of  $64.4  million  of  mortgage-backed
securities  (MBS's),  $56.0  million of CMO's and $9.4  million  of U.S.  Agency
Notes,  partially  offset by  principal  paydowns of $76.0  million of CMO's and
MBS's,  $25.0 million of calls of U.S. Agency Notes and sales of $7.2 million of
CMO's and MBS's at September 30, 2003.  Investment securities available for sale
consisted  of $131.7  million  in fixed  rate  securities  and $7.6  million  in
adjustable  rate  securities  at September  30,  2003. A comparison  of cost and
approximate  market  values of  investment  securities  available for sale as of
September 30, 2003 and December 31, 2002 follows:

<TABLE>
<CAPTION>
                                      September 30, 2003                      December 31, 2002
-----------------------------------------------------------------------  ---------------------------
                                     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. Agency Notes     $  9,352,814 $   66,861  $        0  $  9,419,675  $ 24,993,110 $ 25,358,000
CMO's                   38,499,322    264,353    (151,287)   38,612,388    21,978,385   22,107,521
MBS's                   90,341,007  1,062,992     (89,072)   91,314,927    69,631,991   71,147,440
                      -------------------------------------------------  ----- -------------------
Total                 $138,193,143 $1,394,206  $ (240,359) $139,346,990  $116,603,486 $118,612,961
                      =================================================  =========================
</TABLE>

                                       8
<PAGE>

Loans,  net - increased  $33.4  million to $395.1  million at September 30, 2003
from $361.7 million at December 31, 2002. This increase was primarily the result
of $141.3 million of loans originated,  partially offset by approximately $107.1
million of principal  collected on loans during the nine months ended  September
30, 2003. The following table shows loans  receivable by major categories at the
dates indicated.

                              September 30,     December 31,
                                  2003             2002
------------------------------------------------------------

Mortgage Loans                $275,506,865     $272,777,144
Construction Loans                 815,688          305,607
Commercial Construction          5,315,508        1,157,268
Consumer Loans                   2,915,645        3,521,889
Commercial Real Estate         104,069,967       76,354,155
Commercial Business             11,543,357       12,621,048
------------------------------------------------------------
Subtotal                       400,167,030      366,737,111
Less:
    Deferred loan fees             758,269          745,236
    Allowance for
       loan losses               4,331,928        4,317,475
------------------------------------------------------------
Total loans, net              $395,076,833     $361,674,400
============================================================

At September 30, 2003, 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 $435  thousand  and $762  thousand of
loans that were collectively  measured for impairment with a valuation allowance
of $21 thousand.  The Bank had $4.3 million in total reserves for loan losses at
September 30, 2003,  representing  approximately  248% of non-accrual  loans and
1.08% of total loans.  For the nine months ended September 30, 2003, the average
recorded  investment in impaired loans was approximately $1.9 million.  The Bank
recognized $59 thousand of interest income on impaired loans for the nine months
ended September 30, 2003, all of which was recognized on the cash basis.

As of September  30, 2003 the Bank had  outstanding  loan  commitments  of $20.8
million,  of which  $10.1  million  represented  variable  rate  loans and $10.7
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.

                                                   September 30,   December 31,
                                                       2003            2002
                                                   -------------   -------------
Loans accounted for on a non-accrual basis:
Mortgage loans:
    One-to-four family                              $   558,670     $   960,558
    Commercial real estate                            1,188,504       1,785,864
    Consumer and other                                    3,983          11,789
                                                    -----------     -----------
        Total non-accrual loans                     $ 1,751,157     $ 2,758,211
                                                    -----------     -----------

    Troubled debt restructuring                     $ 1,073,579       $ 986,581
    Real estate owned, net                              397,353         291,200
    Other non-performing assets                               -          87,926
                                                    -----------     -----------
    Total non-performing assets, net                $ 3,222,089     $ 4,123,918
                                                    -----------     -----------


    Total non-accrual loans to net loans                   0.44%           0.76%
                                                    ===========     ===========
    Total non-accrual loans to total assets                0.15%           0.24%
                                                    ===========     ===========
    Total non-performing assets to total assets            0.27%           0.37%
                                                    ===========     ===========

Mortgage-Backed  Securities Held to Maturity - decreased $18.5 million to $323.6
million at September  30, 2003 from $342.1  million at December  31,  2002.  The
decrease is the result of principal  paydowns of $168.3 million partially offset
by the  purchases  of $150.3  million of FNMA and FHLMC  fixed rate  securities.
Mortgage-backed  securities at September 30, 2003 consisted of $295.0 million in
fixed  rate  securities  and  $28.6  million  in  adjustable  rate   securities.
Mortgage-backed  securities  held to maturity at September 30, 2003 and December
31, 2002 are summarized below:

<TABLE>
<CAPTION>
                          September 30, 2003                             December 31, 2002
------------------------------------------------------------------   ---------------------------
                         Gross           Gross         Estimated                    Estimated
          Amortized    Unrealized      Unrealized        Market       Amortized       Market
             Cost        Gains           Losses          Value          Cost          Value
------------------------------------------------------------------   ---------------------------
<S>   <C>            <C>            <C>             <C>            <C>            <C>
GNMA    $ 18,394,691   $    969,692   $       (148)   $ 19,364,235   $ 33,862,839   $ 35,556,313
FNMA     212,391,460      4,368,966       (288,594)    216,471,832    233,608,680    239,975,322
FHLMC     92,843,767        971,994       (452,042)     93,363,719     74,651,159     76,090,093
        ----------------------------------------------------------   ---------------------------
Total   $323,629,918   $  6,310,652   $   (740,784)   $329,199,786   $342,122,678   $351,621,728
        ==========================================================   ===========================
</TABLE>



                                       10
<PAGE>

Deposits - increased  $66.4 million to $866.7 million at September 30, 2003 from
$800.3  million at December 31, 2002. On March 28, 2003,  the Bank purchased the
deposits of the Florence  branch of Sun National  Bank totaling  $17.9  million.
Non-interest bearing checking accounts increased $27.5 million, savings accounts
increased  $23.1 million,  interest  bearing  checking  deposits  increased $9.9
million,  money  market  accounts  increased  $6.4 million and  certificates  of
deposits  decreased $485 thousand for the nine months ended  September 30, 2003.
Interest credited to depositors accounts for the nine months ended September 30,
2003  amounted  to  $6.8  million.   The  following  table  sets  forth  certain
information concerning deposits at the dates indicated.

<TABLE>
<CAPTION>

                              September 30,                            December 31,
                                  2003                                    2002
------------------------------------------------------------------------------------------------------------
                                               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            $162,426,159   18.74%       0.00%       $134,969,939   16.85%        0.00%
Checking accounts                 165,591,094   19.11%       0.59%        155,730,226   19.46%        1.18%
Savings accounts                  184,558,798   21.29%       0.74%        161,458,450   20.18%        1.34%
Money market accounts             131,174,100   15.14%       0.82%        124,795,059   15.59%        1.86%
Certificates                      222,901,088   25.72%       2.53%        223,386,548   27.92%        3.58%
------------------------------------------------------------------------------------------------------------
   Total Deposits                $866,651,239  100.00%       1.08%       $800,340,222  100.00%        1.86%
============================================================================================================
</TABLE>


Borrowings  - at  September  30,  2003  amounted to $236.2  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 $11.2 million in Federal Home
Loan Bank Advances with a weighted  average  interest rate of 1.53%. At December
31,  2002  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 September 30, 2003 and December 31, 2002 consisted of $25.0
million of Trust Capital Securities. The interest rate resets every three months
to LIBOR plus 360 basis points and will not exceed 11.00% through the first five
years from its issuance.

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  September  30,
2003 of $900  thousand,  or $.14 diluted  earnings per share as compared to $2.0
million,  or $.30 diluted earnings per share for the comparable  period in 2002.
The Corporation recorded net income for the nine months ended September 30, 2003
of $4.0 million, or $.62 diluted earnings per share as compared to $6.3 million,
or $.96 diluted earnings per share for the comparable period in 2002.

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.

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:


                                       12

<PAGE>
<TABLE>
<CAPTION>
                                                       Three Months Ended September 30,
----------------------------------------------------------------------------------------------------------
                                                   2003                                 2002
----------------------------------------------------------------------     -------------------------------
                                     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               $  391,661    $ 6,024       6.15%      $362,946    $ 6,425     7.08%
    Interest-bearing deposit           44,450        115       1.03%        56,552        256     1.81%
    Mortgage-backed securities        391,044      3,508       3.59%       339,519      4,782     5.63%
    Investment securities             261,423      2,021       3.09%       219,926      3,047     5.54%
                                   ----------    -------      ------      --------    -------    ------
Total interest-earning
        assets                      1,088,578     11,668       4.29%       978,943     14,510     5.93%
                                   ----------    -------      ------      --------    -------    ------
Interest-bearing liabilities:
    Checking deposits                 321,628        190       0.24%       261,114        407     0.62%
    Savings deposits                  183,699        268       0.58%       146,364        480     1.31%
    Money Market depsoits             131,979        219       0.66%       114,702        532     1.86%
    Time deposit                      224,232      1,241       2.21%       229,815      1,936     3.37%
    Borrowings                        236,191      2,386       4.04%       210,641      2,314     4.39%
    Long-Term Debt                     25,774        314       4.87%        29,107        446     6.13%
                                   ----------    -------      ------      --------    -------    ------
Total interest-bearing
        liabilities                $1,123,503      4,618       1.64%      $991,743      6,115     2.47%
                                   ==========    -------      ------      ========    -------    ------
Net interest income                              $ 7,050                              $ 8,395
                                                 =======                              =======
Interest rate spread                                           2.65%                              3.46%
                                                              ======                             ======
Net yield on average
  interest-earning assets                                      2.59%                              3.43%
                                                              ======                             ======
Ratio of average interest-
    earning assets to average
    interest-bearing liabilities                              96.89%                             98.71%
                                                              ======                             ======
</TABLE>
<TABLE>
<CAPTION>
                                                        Nine Months Ended September 30,
----------------------------------------------------------------------------------------------------------
                                                   2003                                 2002
----------------------------------------------------------------------     -------------------------------
                                     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               $  383,148      $18,308       6.37%      $360,315    $19,168     7.09%
    Interest-bearing deposit           44,706          402       1.20%        50,718        768     2.02%
    Mortgage-backed securities        383,435       11,815       4.11%       309,346     13,616     5.87%
    Investment securities             256,162        7,012       3.65%       227,299     10,109     5.93%
                                   ----------      -------      ------      --------    -------    ------
Total interest-earning
        assets                      1,067,451       37,537       4.69%       947,678     43,661     6.14%
                                   ----------      -------      ------      --------    -------    ------
Interest-bearing liabilities:
    Checking deposits                 305,735          709       0.31%       255,957      1,258     0.66%
    Savings deposits                  177,110          987       0.74%       141,858      1,475     1.39%
    Money Market depsoits             129,721          799       0.82%       104,418      1,540     1.97%
    Time deposit                      224,896        4,260       2.52%       236,211      6,577     3.71%
    Borrowings                        236,202        7,094       4.00%       197,910      6,667     4.49%
    Long-Term Debt                     25,774          973       5.03%        25,422      1,380     7.24%
                                   ----------      -------      ------      --------    -------    ------
Total interest-bearing
        liabilities                $1,099,438       14,822       1.80%      $961,776     18,897     2.62%
                                   ==========      -------      ------      ========    -------    ------
Net interest income                                $22,715                              $24,764
                                                   =======                              =======
Interest rate spread                                             2.89%                              3.52%
                                                                ======                             ======
Net yield on average
  interest-earning assets                                        2.84%                              3.48%
                                                                ======                             ======
Ratio of average interest-
  earning assets to average
  interest-bearing liabilities                                  97.09%                             98.53%
                                                                ======                             ======
</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 September 30,             Nine Months Ended September 30,
                                              2003 vs. 2002                                 2003 vs. 2002
                                    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                             $   (909)   $    508    $   (401)           $ (2,075)   $  1,215    $   (860)
    Interest-bearing deposits              (86)        (55)       (141)               (275)        (91)       (366)
    Mortgage-backed securities          (2,000)        726      (1,274)             (5,062)      3,261      (1,801)
    Investment securities               (1,601)        575      (1,026)             (4,381)      1,284      (3,097)
                                      --------------------------------            --------------------------------
    Total change - interest income      (4,596)      1,754      (2,842)            (11,793)      5,669      (6,124)
                                      --------------------------------            --------------------------------
Interest expense:
    Checking deposits                     (311)         94        (217)               (794)        245        (549)
    Savings deposit                       (334)        122        (212)               (855)        367        (488)
    Money market deposit                  (393)         80        (313)             (1,114)        373        (741)
    Time deposit                          (648)        (47)       (695)             (2,002)       (315)     (2,317)
    Borrowings                            (209)        281          72                (863)      1,290         427
    Long-Term Debt                         (81)        (51)       (132)               (426)         19        (407)
                                      --------------------------------            --------------------------------
    Total change - interest expense     (1,976)        479      (1,497)             (6,054)      1,979      (4,075)
                                      --------------------------------            --------------------------------
Net change in net interest income     $ (2,620)   $  1,275    $ (1,345)           $ (5,739)   $  3,690    $ (2,049)
                                      ================================            ================================
</TABLE>

                                       14
<PAGE>

Net  Interest  Income - for the three and nine months ended  September  30, 2003
totaled $7.1 million and $22.7 million,  respectively.  Net interest  income for
the three months ended September 30, 2003 decreased $1.3 million compared to the
same  period  in 2002 due  primarily  to lower  market  interest  rates  causing
decreases in interest  income on  mortgage-backed  securities  of $1.3  million,
investment   securities   of  $1.0   million,   loans  of  $401   thousand   and
interest-bearing  deposits of $141  thousand,  partially  offset by decreases in
interest  expense  on  deposits  of $1.4  million  and  long  term  debt of $132
thousand.

The  decrease  in  interest  income was  primarily  the result of a decrease  in
interest  income on  mortgage-backed  securities of $1.3 million to $3.5 million
for the three  months  ended  September  30, 2003 from $4.8 million for the same
period in 2002.  The  average  yield of the MBS  portfolio  decreased  204 basis
points to 3.59% for the quarter ended September 30, 2003 from 5.63% for the same
period in 2002,  which resulted in an interest  income  decrease of $2.0 million
due to rate changes.  The average  balance of MBS's  increased  $51.5 million to
$391.0 million for the three months ended September 30, 2003 from $339.5 million
for the same  period  in 2002,  which  resulted  in an  interest  income  volume
increase of $726 thousand.

Interest income on investment  securities decreased $1.0 million to $2.0 million
for the three  months  ended  September  30, 2003 from $3.0 million for the same
period in 2002.  The  investment  portfolio  interest  income was  significantly
reduced by increased prepayments,  which require faster than normal amortization
of premiums  previously paid on investments and reflected in reduced yields. The
average yield of the  investment  portfolio  decreased 245 basis points to 3.09%
for the quarter ended September 30, 2003 from 5.54% for the same period in 2002,
which  resulted  in an  interest  income  decrease  of $1.6  million due to rate
changes. The average balance of investment securities increased $41.5 million to
$261.4 million for the three months ended September 30, 2003 from $219.9 million
for the same period in 2002,  which  resulted  in a volume  increase in interest
income of $575 thousand.

Interest  income on loans  decreased $401 thousand to $6.0 million for the three
months ended  September  30, 2003 from $6.4 million for the same period in 2002.
The  average  rate on loans  decreased  93 basis  points  to 6.15% for the three
months ended  September  30, 2003 from 7.08% for the same period in 2002,  which
resulted in a decrease in interest  income of $909 thousand due to rate changes.
The average  balance of the loan  portfolio  increased  $28.8  million to $391.7
million for the three months ended  September  30, 2003 from $362.9  million for
the same period in 2002,  which resulted in a volume increase in interest income
of $508 thousand.

Interest  expense on time deposits  decreased  $695 thousand to $1.2 million for
the three months ended  September 30, 2003 from $1.9 million for the same period
in 2002.  The average rate on time deposits  decreased 116 basis points to 2.21%
for the quarter ended September 30, 2003 from 3.37% for the same period in 2002,
which resulted in a decrease in interest  expense of $648 thousand.  The average
balance of time deposits  decreased $5.6 million to $224.2 million for the three
months ended September 30, 2003 from $229.8 million for the same period in 2002,
which resulted in a volume decrease in interest expense of $47 thousand.

Interest expense on checking  deposits  decreased $217 thousand to $190 thousand
for the three months ended  September  30, 2003 from $407  thousand for the same
period in 2002. The average rate on checking deposits  decreased 38 basis points
to 0.24% for the quarter ended September 30, 2003 from 0.62% for the same period
in 2002, which resulted in a decrease in interest expense of $311 thousand.  The
average balance of checking  deposits  increased $60.5 million to $321.6 million
for the three months ended September 30, 2003 from $261.1 for the same period in
2002, which resulted in a volume increase in interest expense of $94 thousand.

                                       15
<PAGE>

Interest  expense on money  market  deposits  decreased  $313  thousand  to $219
thousand for the three months ended  September  30, 2003 from $532  thousand for
the same period in 2002. The average rate on money market deposits decreased 120
basis points to 0.66% for the quarter  ended  September  30, 2003 from 1.86% for
the same period in 2002,  which resulted in a rate decrease in interest  expense
of $393 thousand.  The average balance of money market deposits  increased $17.3
million to $132.0  million for the three  months ended  September  30, 2003 from
$114.7 million for the same period in 2002,  which resulted in a volume increase
in interest expense of $80 thousand.

Interest  expense on  borrowings  increased $72 thousand to $2.4 million for the
three months ended  September  30, 2003 from $2.3 million for the same period in
2002.  The  average  balance of  borrowings  increased  $25.6  million to $236.2
million at September  30, 2003 from $210.6  million for the same period in 2002,
which resulted in a volume  increase in interest  expense of $281 thousand.  The
average  rate  paid on  borrowings  decreased  35 basis  points to 4.04% for the
quarter ended  September 30, 2003 from 4.39% for the same period in 2002,  which
resulted in a decrease in interest expense of $209 thousand due to rate changes.

Net interest  income for the nine months ended September 30, 2003 decreased $2.0
million  primarily due to decreases in interest income on investment  securities
of $3.1  million,  mortgage-backed  securities  of $1.8  million,  loans of $860
thousand, interest-bearing deposits of $366 thousand and an increase in interest
expense on  borrowings  of $427  thousand,  partially  offset by a  decrease  in
interest  expense on deposits of $4.1 million and a decrease in interest expense
on long-term  debt of $407 thousand as compared to the same nine month period in
2002.

The decrease in interest  income on investment  securities was due to a decrease
in the average  yield on the  investment  portfolio of 228 basis points to 3.65%
for the nine months ended  September  30, 2003 from 5.93% for the same period in
2002,  which  resulted in a decrease in interest  income of $4.4  million due to
rate changes.  The average  balance of the portfolio  increased $28.9 million to
$256.2 million for the nine months ended  September 30, 2003 from $227.3 million
for the same period in 2002,  which  resulted  in a volume  increase in interest
income of $1.3 million. The increase in the average balance was primarily due to
purchases of $442.7 million, partially offset by investment calls and maturities
of $103.8 million and principal paydowns of $279.5 million.

The  decrease  in interest  income on  mortgage-backed  securities  was due to a
decrease in the average  yield on the portfolio of 176 basis points to 4.11% for
the nine months ended September 30, 2003 from 5.87% for the same period in 2002,
which  resulted  in a decrease in  interest  income of $5.1  million due to rate
changes.  The average balance of the portfolio increased $74.1 million to $383.4
million for the nine months ended September 30, 2003 from $309.3 million for the
nine months ended September 30, 2002,  which resulted in a $3.3 million increase
in interest  income.  The  increase in the average  balance was due to purchases
during  this period of $209.0  million,  partially  offset by $216.8  million of
principal paydowns from September 2002 through September 2003.

The  decrease in  interest  income on loans was due to a decrease in the average
yield on loans of 72 basis points to 6.37% for the nine months  ended  September
30, 2003 from 7.09% for the same period in 2002, which resulted in a decrease in
interest  income of $2.1  million due to rate  changes.  The average  balance of
loans  increased  $22.8  million to $383.1  million  for the nine  months  ended
September 30, 2003 from $360.3  million for the nine months ended  September 30,
2002, which resulted in a $1.2 million volume increase in interest  income.  The
increase  in the  average  balance  is  primarily  due to an  increase  in  loan
originations.

                                       16
<PAGE>

Interest expense on time deposits decreased $2.3 million to $4.3 million for the
nine months  ended  September  30, 2003 from $6.6 million for the same period in
2002. The average rate on time deposits  decreased 119 basis points to 2.52% for
the nine months ended September 30, 2003 from 3.71% for the same period in 2002,
which  resulted  in a rate  decrease in interest  expense of $2.0  million.  The
average  balance of time deposits  decreased $11.3 million to $224.9 million for
the nine months ended September 30, 2003 from $236.2 million for the same period
in 2002,  which  resulted  in a volume  decrease  in  interest  expense  of $315
thousand.

Interest expense on checking  deposits  decreased $549 thousand to $709 thousand
for the nine months  ended  September  30,  2003 from $1.3  million for the same
period in 2002. The average rate on checking deposits  decreased 35 basis points
to 0.31% for the nine months  ended  September  30, 2003 from 0.66% for the same
period in 2002,  which  resulted  in a  decrease  in  interest  expense  of $794
thousand.  The average balance of checking  deposits  increased $49.7 million to
$305.7 million for the nine months ended  September 30, 2003 from $256.0 for the
same period in 2002,  which resulted in a volume increase in interest expense of
$245 thousand.

Interest  expense on money  market  deposits  decreased  $741  thousand  to $799
thousand for the nine months ended  September 30, 2003 from $1.5 million for the
same period in 2002.  The average rate on money market  deposits  decreased  115
basis  points to 0.82% for the nine months ended  September  30, 2003 from 1.97%
for the same period in 2002, which resulted in a decrease in interest expense of
$1.1  million.  The average  balance of money market  deposits  increased  $25.3
million to $129.7  million for the nine  months  ended  September  30, 2003 from
$104.4 million for the same period in 2002,  which resulted in a volume increase
in interest expense of $373 thousand.

The increase in interest  expense on borrowings was the result of an increase in
the average balance of $38.3 million to $236.2 million for the nine months ended
September  30,  2003 from  $197.9  million  for the same  period in 2002,  which
resulted in a volume increase in interest  expense of $1.3 million.  The average
yield on borrowings decreased 49 basis points to 4.00% for the nine months ended
September 30, 2003 from 4.49% for the same period in 2002,  which  resulted in a
decrease in interest expense of $863 thousand due to rate changes.

Interest  expense on long-term debt decreased $407 thousand to $973 thousand for
the nine months ended  September  30, 2003 from $1.4 million for the same period
in 2002. The $25.0 million in Trust capital securities were issued in March 2002
at an initial floating rate of 5.59%.


                                       17
<PAGE>


Critical Accounting  Estimate-Provision  for Loan Losses - A critical accounting
estimate is the provision for loan losses,  which  increased $15 thousand to $75
thousand for the three months ended September 30, 2003 from $60 thousand for the
same period in 2002.  The  allowance  for loan losses  totaled  $4.3  million at
September  30, 2003 and December 31, 2002.  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 nine month periods ended September 30, 2003 was
$1.3 million and $4.3 million,  as compared to $1.1 million and $3.3 million for
the same periods in 2002.  The increase for the nine months ended  September 30,
2003 was  primarily  due to a $601 thousand gain on the sale of real estate held
for development.  The final parcel of land, located in Burlington Township,  was
sold in  January  2003.  The Bank sold $7.2  million  of  investment  securities
available  for sale during the nine  months  ended  September  30,  2003,  which
resulted in a $286 thousand gain. Additionally, retail banking fees increased as
a result of the five branches opened since the third quarter of 2002.

Operating  Expenses - for the three and nine month periods  ended  September 30,
2003 totaled $6.8 million and $20.2 million,  respectively,  as compared to $6.1
million and $17.8 million for the same periods in 2002.

Salaries  and  Employee  Benefits - for the three and nine month  periods  ended
September  30,  2003  were $3.9  million  and $11.6  million,  respectively,  as
compared  to $3.5  million and $10.3  million  for the same period in 2002.  The
increase was primarily due to additional  staff in the five new branches  opened
since the third  quarter of 2002.  Average  full time  equivalent  employees  at
September 30, 2003 were 507 as compared to 468 at September 30, 2002.

Occupancy and Equipment- for the three and nine month period ended September 30,
2003 were $1.4  million  and $4.1  million,  respectively,  as  compared to $1.1
million and $3.4  million for the same period in 2002.  This  increase is due to
additional  depreciation and occupancy  expense on the new branch offices opened
since the third quarter of 2002, as well as other facility  improvements and new
computer equipment additions during this period.

                                       18
<PAGE>

Purchased  Services - for the three and nine month periods  ended  September 30,
2003 totaled $745  thousand and $2.1  million,  as compared to $650 thousand and
$1.9 million for the same periods in 2002.  ATM charges  increased $196 thousand
for the first nine months of 2003  compared  to the same  period in 2002.  Check
processing  costs  decreased $6 thousand for the nine months ended September 30,
2003  compared  to the same  period in 2002 due to an  increased  use of on-line
banking services.

ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There were no significant  changes for the nine months ended  September 30, 2003
from the  information  presented in the annual  report on Form 10-K for the year
ended December 31, 2002.

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 Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods  specified in Securities and Exchange  Commission  rules
and forms.

(b) Changes in internal  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.

                                       19
<PAGE>

PART II.          OTHER INFORMATION



         Item 1:  Legal Proceedings

                           None


         Item 2:  Changes in Securities and Use of Proceeds

                           None


         Item 3:  Defaults Upon Senior Securities

                           None


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

                           None

         Item 5:  Other Information

                           On March 28, 2003, the Bank purchased the deposits of
                           the  Florence  branch of Sun National  Bank  totaling
                           $17.9 million.

         Item 6:  Exhibits and Reports on Form 8-K

                           (a) Exhibits:

                           (i) 31 certifications  pursuant to Rule 13a-14 of the
                           Securities Exchange Act of 1934, as amended.

                           (ii)32  certification pursuant to Section 1350 of the
                           Sarbanes-Oxley Act of 2002.

                           (b) Reports on Form 8-K:

                                (i) The  Registrant  filed  a Report on Form 8-K
                           pursuant to Items 7 and 12 on July 31, 2003 to report
                           earnings for the quarter ended June 30, 2003.

                                       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: November 13, 2003                    /s/Craig W. Yates
                                           -------------------------------------
                                           Craig W. Yates
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)



Date: November 13, 2003                    /s/Channing L. Smith
                                           -------------------------------------
                                           Channing L. Smith
                                           Vice President and
                                           Chief Financial Officer
                                           (Principal Financial Officer)