U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

                                   FORM 10-QSB

    [X]                 QUARTERLY REPORT UNDER SECTION 13
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED:      JUNE 30, 2005
                                                  -------------------

                                       OR
                                       --

    [ ]             TRANSITION REPORT PURSUANT TO SECTION 13
                     OF THE SECURITIES EXCHANGE ACT OF 1934


COMMISSION FILE NUMBER:     0-24675
                           ---------


                       STATE OF FRANKLIN BANCSHARES, INC.
                   ------------------------------------------
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

          TENNESSEE                                       62-1749121
---------------------------------               --------------------------------
    (STATE OF INCORPORATION)                           (I.R.S.  EMPLOYER
                                                       IDENTIFICATION NO.)


             1907 NORTH ROAN
          JOHNSON CITY, TENNESSEE                                  37601
         --------------------------                                -----
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)


                                 (423) 926-3300
                   ------------------------------------------
                (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)


                                      NONE
                   ------------------------------------------
      (FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)


INDICATE BY CHECK MARK WHETHER THE ISSUER: (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15 (D) OF THE  SECURITIES  EXCHANGE ACT OF 1934 DURING
THE  PRECEDING 12 MONTHS (OR FOR SUCH  SHORTER  PERIOD THAT THE  REGISTRANT  WAS
REQUIRED  TO FILE  SUCH  REPORTS),  AND  (2) HAS  BEEN  SUBJECT  TO SUCH  FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

                                    YES   X          NO
                                        ----

                                    1,481,462
                   ------------------------------------------
     (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 9, 2005)


           TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):

                                    YES            NO    X
                                                       ----



<PAGE>


                        STATE OF FRANKLIN BANCSHARES, INC

                                      INDEX
                                      -----
<TABLE>
<CAPTION>
PART I.        FINANCIAL INFORMATION

        ITEM 1.   FINANCIAL STATEMENTS                                                     PAGE
                                                                                         -------
<S>                                                                                      <C>
                  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION                               3
                     JUNE 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004 (AUDITED)

                  CONSOLIDATED STATEMENTS OF INCOME
                     THREE MONTHS ENDED JUNE 30, 2005 (UNAUDITED) AND 2004 (UNAUDITED)         4
                     SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) AND 2004 (UNAUDITED)           5

                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                   6
                     SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
                     AND YEAR ENDED DECEMBER 31, 2004 (AUDITED)

                  CONSOLIDATED STATEMENTS OF CASH FLOWS                                        7
                     SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) AND 2004 (UNAUDITED)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                       8


         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS                                                15

         ITEM 3.  CONTROLS AND PROCEDURES                                                     17



PART II.   OTHER INFORMATION

        ITEM 1.   LEGAL PROCEEDINGS                                                           18

        ITEM 2.   CHANGES IN SECURITIES                                                       18

        ITEM 3.   DEFAULT UPON SENIOR SECURITIES                                              18

        ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                         18

        ITEM 5.   OTHER INFORMATION                                                           18

        ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K                                            18

</TABLE>






                                        2








<PAGE>

PART 1  -  FINANCIAL INFORMATION

         ITEM 1.   FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                             STATE OF FRANKLIN BANCSHARES, INC.

                        CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                                                                  JUNE 30,          DECEMBER 31,
                             ASSETS                           2005 - UNAUDITED     2004 - AUDITED
-------------------------------------------------------------------------------------------------
<S>                                                              <C>                  <C>
Cash and Due from Banks                                          $   9,306,801          5,564,907
Federal Funds Sold                                                  12,000,000          7,130,000
Short-Term Interest Bearing Deposits                                   942,183          2,279,711
-------------------------------------------------------------------------------------------------
   Total Cash and Cash Equivalents                                  22,248,984         14,974,618
-------------------------------------------------------------------------------------------------
Investments - HTM
   (Estimated Market 2005 - $47,039,450 and 2004 - $49,864,335)     47,237,828         49,702,867
Investments - AFS                                                   51,858,515         53,650,416
Loans Held for Sale                                                    657,075            374,700
Loans and Leases Receivable                                        175,669,254        164,458,145
   Less: Allowance for Loan and Lease Losses                      (  1,803,387)       ( 1,601,332)
-------------------------------------------------------------------------------------------------
   Loans and Leases Receivable, Net                                173,865,867        162,856,813
-------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net                                     1,567,741          1,490,634
Land, Buildings & Equip at Cost Less Accum Depr
   of $2,931,827 in 2005 and $2,643,828 in 2004                      7,964,413          7,468,710
Prepaid Expense and Accounts Receivable                                138,183            175,816
Deferred Tax Assets                                                  1,849,170          1,727,642
FHLB Stock                                                           2,510,600          2,453,300
Investment in Service Bureau at Cost                                         -            815,009
Other Real Estate Owned                                                884,656            891,413
Other Assets                                                            86,958            124,241
-------------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                   $ 310,869,990        296,706,179
=================================================================================================
             LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits                                           $  18,942,932         15,371,046
Interest-Bearing Deposits                                          206,600,166        198,784,547
Advances to Borrowers for Taxes and Insurance                          301,372            110,328
Accrued Interest on Deposits                                           272,558            136,476
Accrued State and Federal Taxes                                    (   165,776)       (   149,118)
Other Accounts Payable and Accrued Expenses                            741,867            784,704
Repurchase Agreements                                                  387,808          1,024,608
FHLB Long-Term Advances                                             46,165,680         46,180,671
Deferred Credits on REO                                                189,384            189,384
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                         $ 273,435,991        262,432,646
-------------------------------------------------------------------------------------------------

Guaranteed Preferred Beneficial Interest in
   Subordinated Debentures                                           8,000,000          8,000,000

STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value                                        1,481,462          1,465,512
Paid-in Capital                                                     14,598,374         14,251,461
Accumulated Other Comprehensive Income                             ( 2,113,262)       ( 2,005,925)
Retained Earnings                                                   16,035,029         13,204,732
  Less: Employee Stock Ownership                                   (   567,604)       (   642,247)
-------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                $  29,433,999         26,273,533
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 310,869,990        296,706,179
=================================================================================================
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                        3


<PAGE>

<TABLE>
<CAPTION>
                         STATE OF FRANKLIN BANCSHARES, INC.
                         CONSOLIDATED STATEMENTS OF INCOME

                                                         THREE MONTHS ENDED JUNE 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2005 - UNAUDITED  2004 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                     <C>                    <C>
Interest and Fees on Loans                              $    2,933,302         2,353,706
Other Interest Income                                        1,296,602         1,180,202
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 4,229,904         3,533,908
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         1,144,243         1,014,116
Interest on Repurchase Agreements                                2,427             2,340
Interest on Short-Term Debt                                        413               690
Interest on Long-Term Debt                                     524,715           523,498
Interest on Subordinated Debentures                            148,878           109,517
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                1,820,676         1,650,161
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           2,409,228         1,883,747
PROVISION FOR LOAN LOSSES                                     (140,000)          (10,000)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            2,269,228         1,873,747
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 159,486           146,423
Net Gain on Loans Sold                                          88,970            98,431
Realized Gain on Securities                                  2,574,788                 -
Real Estate Sales Commission Income                            156,207           106,201
Insurance Commission Income                                     20,970            17,823
Rental Income, Net                                              17,225            25,997
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                    3,017,646           394,875
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                              907,259           725,515
Occupancy Expenses                                             115,306           105,545
Furniture and Equipment Expense                                129,426           130,147
Advertising                                                     73,778            72,644
Data Processing Expense                                        155,415           156,090
Other                                                          491,124           345,676
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  1,872,308         1,535,617
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                              3,414,566           733,005
PROVISION FOR INCOME TAXES                                  (1,139,379)         (157,202)
----------------------------------------------------------------------------------------
       NET INCOME                                       $    2,275,187           575,803
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                 $         1.58              0.41
  DILUTED                                                         1.42              0.38
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,436,821         1,397,269
  DILUTED                                                    1,599,995         1,533,126
========================================================================================
</TABLE>


The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                          4



<PAGE>


<TABLE>
<CAPTION>
                         STATE OF FRANKLIN BANCSHARES, INC.
                         CONSOLIDATED STATEMENTS OF INCOME

                                                           SIX MONTHS ENDED JUNE 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2005 - UNAUDITED  2004 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                    <C>               <C>
Interest and Fees on Loans                             $     5,652,356         4,797,338
Other Interest Income                                        2,453,795         2,324,016
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 8,106,151         7,121,354
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         2,072,563         2,074,090
Interest on Repurchase Agreements                                4,509             4,948
Interest on Short-Term Debt                                        816               650
Interest on Long-Term Debt                                   1,043,799           986,626
Interest on Subordinated Debentures                            284,609           217,804
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                3,406,296         3,284,118
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           4,699,855         3,837,236
PROVISION FOR LOAN LOSSES                                   (  200,000)       (   20,000)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            4,499,855         3,817,236
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 308,519           265,333
Net Gain on Loans Sold                                         143,875           170,780
Realized Gain on Securities                                  2,574,788                 -
Real Estate Sales Commission Income                            256,877           161,482
Insurance Commission Income                                     30,497            29,147
Rental Income, Net                                              32,134            47,011
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                    3,346,690           673,753
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                            1,776,750         1,443,468
Occupancy Expenses                                             237,368           203,969
Furniture and Equipment Expense                                248,305           253,895
Advertising                                                    187,038           136,068
Data Processing Expense                                        320,833           318,205
Other                                                          931,111           673,182
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  3,701,405         3,028,787
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                              4,145,140         1,462,202
PROVISION FOR INCOME TAXES                                  (1,314,842)       (  333,968)
----------------------------------------------------------------------------------------
       NET INCOME                                      $     2,830,298         1,128,234
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                $          1.98               .81
  DILUTED                                                         1.79               .74
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,430,917         1,396,486
  DILUTED                                                    1,584,241         1,522,724
========================================================================================
</TABLE>



  The accompanying notes are an integral part of the consolidated financial
statements.


                                          5


<PAGE>

<TABLE>
<CAPTION>


                       STATE OF FRANKLIN BANCSHARES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
                   AND YEAR ENDED DECEMBER 31, 2004 (AUDITED)


                                                               Accumulated
                                                                  Other                 Employee
                                     Common         Paid-In    Comprehensive Retained     Stock
                                      Stock         Capital        Income     Earnings   Ownership       Total
                                  --------------  ----------  ------------  ---------  -----------   ------------
<S>                                    <C>         <C>         <C>         <C>          <C>           <C>
Balance at December 31, 2003           1,465,512   14,251,461  (  797,592) 10,356,572   ( 784,995)     24,490,958

ESOP Shares Allocated                         --           --          --          --     142,748         142,748

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Losses
        Arising During the Period
         (Net of $764,826 Income Tax Benefit) --           --  (1,232,308)         --          --      (1,232,308)
      Less: Reclassification Adjustment
          (Net of $14,880 Tax Benefit)        --           --      23,975          --          --          23,975
                                                                                                     ------------
                                                                                                       (1,208,333)

  Net Income                                  --           --          --   2,848,159          --       2,848,159
                                                                                                     ------------
        Total Comprehensive Income            --           --          --          --          --       1,639,826
                                    ------------   ----------   ---------  ----------  ----------    ------------
Balance at December 31, 2004           1,465,512   14,251,461  (2,005,925) 13,204,731   ( 642,247)     26,273,532

Net Proceeds
  From Sale of Stock                      15,950      346,913          --          --          --         362,863

ESOP Shares Allocated                         --           --          --          --      74,643          74,643

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Gains
        Arising During the Period
         (Net of $66,764 Income Tax Benefit)  --           --  (  107,572)         --          --     (   107,572)
      Less: Reclassification Adjustment
         (Net of $146 Income Tax)             --           --         235          --          --             235
                                                                                                     ------------
                                                                                                      (   107,337)

  Net Income                                  --           --          --   2,830,298          --       2,830,298
                                                                                                     ------------
        Total Comprehensive Income            --           --          --          --          --       2,722,961
                                    ------------   ----------   ---------  ----------   ---------    ------------
Balance at June 30, 2005               1,481,462   14,598,374  (2,113,262) 16,035,029   ( 567,604)     29,433,999
                                    ============   ==========   =========  ==========   ==========   ============

</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.







                                        6


<PAGE>

                       STATE OF FRANKLIN BANCSHARES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    SIX MONTHS ENDED JUNE 30,
                                                                               ----------------------------------
                                                                               2005 - UNAUDITED  2004 - UNAUDITED
                                                                               ----------------  ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>                <C>
  Net Income                                                                      $   2,830,298        1,128,234
  Items Not Affecting Cash:
    Depreciation                                                                        288,000          287,648
    (Increase) in Accrued Interest                                                      (77,107)         (66,165)
    Deferred Income Taxes (Benefit)                                                     (41,646)          32,327
    Provision for Loan and Lease Losses                                                 200,000           20,000
    (Increase) Decrease in Prepaid Expenses and Accounts Receivable                      37,633          (51,978)
    Increase (Decrease) in Interest Payable                                             136,082          (19,335)
    Increase (Decrease) in State and Federal Taxes Payable                              (16,658)          64,969
    Increase (Decrease) in Other Accounts Payable and Accrued Expenses                  (42,837)         126,675
    Increase in Deferred Loan Fees, Net                                                  16,667           18,854
    Realized (Gain) on Securities                                                    (2,574,788)               -
    Discount Accretion                                                                 (138,278)        (106,876)
    Premium Amortization                                                                296,584          323,274
    Increase in Deferred Gain on Sale of REO                                                  -           31,038
    Earned ESOP Shares                                                                   74,643           70,306
    FHLB Stock Dividends                                                                (57,300)         (47,000)
    Net (Increase) in Loans Held for Sale                                              (282,375)        (496,136)
-----------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                                         648,918        1,315,835
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of Held-to-Maturity Investments                                          (1,136,639)     (22,697,557)
   Proceeds from Maturities of Held-to-Maturity Investments                           1,100,000        6,405,000
   Proceeds from Maturities of Available-for-Sale Investments                         1,243,942        2,226,941
   Principal Payments on Mortgage-backed Securities - HTM                             2,321,612        3,160,002
   Principal Payments on Mortgage-backed Securities - AFS                               419,782        1,563,418
   Proceeds from Sale of Service Bureau Stock                                         3,389,797                -
   (Increase) in Loans Receivable, Net                                              (11,218,964)      (2,896,196)
   Purchases of Premises and Equipment                                                 (783,703)      (1,269,591)
-----------------------------------------------------------------------------------------------------------------
    NET CASH (USED) BY INVESTING ACTIVITIES                                          (4,664,173)     (13,507,983)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase in Deposits                                                           11,387,505        5,735,655
  Net Increase in Advances by Borrowers for Taxes and Insurance                         191,044          178,072
  Net Increase (Decrease) in Repurchase Agreements                                     (636,800)         187,736
  Issuance of Common Stock, Net                                                         362,863                -
  Repayment of FHLB Advances                                                            (14,991)         (14,604)
  Proceeds from FHLB Advances                                                                 -       10,000,000
-----------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                                        11,289,621       16,086,859
-----------------------------------------------------------------------------------------------------------------
      NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            7,274,366        3,894,711
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                        14,974,618       32,141,033
-----------------------------------------------------------------------------------------------------------------
      CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $  22,248,984       36,035,744
=================================================================================================================

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
  Net of Deferred Tax Liability                                                   $    (107,337)        (849,712)
Acquisition of Real Estate Property through Foreclosure of Related Loans          $           -                -
=================================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash Paid During the Period for:
    Income Taxes                                                                  $   1,372,500          242,521
    Interest                                                                      $   3,270,214        3,303,453
=================================================================================================================
</TABLE>


The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.




                                        7



<PAGE>

STATE OF FRANKLIN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

NOTE 1  INCORPORATION AND OPERATIONS
------ ------------------------------

     State of Franklin  Bancshares,  Inc.  (Company) was incorporated  under the
     laws of the State of  Tennessee  for the  purpose of  becoming  the holding
     company of State of franklin  Savings Bank (Savings Bank). The stockholders
     of the Savings Bank  exchanged  their shares for the shares of the Company,
     whereby the Savings Bank became a wholly owned  subsidiary  of the Company.
     State of Franklin Leasing Corporation (Leasing Corp) was incorporated under
     the laws of the State of  Tennessee  for the  purpose  of lease  financing.
     State of Franklin Real Estate,  Inc. (Real Estate Company) was incorporated
     for the purpose of selling  real estate.  The Real Estate  Company and John
     Sevier Title services,  Inc. (Title Company) are wholly owned  subsidiaries
     of the Savings Bank.  The leasing Corp is a wholly owned  subsidiary of the
     Company.


NOTE 2   BASIS OF PREPARATION
------  ----------------------

     The accompanying  consolidated financial statements include the accounts of
     the Company and its subsidiaries. All significant intercompany accounts and
     transactions have been eliminated. These financial statements were prepared
     in accordance  with generally  accepted  accounting  principles for interim
     financial  information  and in accordance  with the  instructions  for Form
     10-QSB.  Accordingly,  they do not include all disclosures  necessary for a
     complete   presentation  of  the   consolidated   statements  of  financial
     condition,  income,  cash  flows,  and changes in  stockholders'  equity in
     conformity with generally  accepted  accounting  principles.  However,  all
     adjustments which are, in the opinion of management, necessary for the fair
     presentation of the interim  financial  statements have been included.  All
     such adjustments are of a normal recurring nature.  The statement of income
     for the six months ended June 30, 2005 is not necessarily indicative of the
     results which may be expected for the entire year.

     These consolidated  financial statements should be read in conjunction with
     the audited  consolidated  financial  statements  and notes thereto for the
     Company for the year ended December 31, 2004.


NOTE 3  RECLASSIFICATIONS
------  -----------------

     In instances where required,  amounts reported in prior period's  financial
     statements  included  herein  have  been  reclassified  to  put  them  on a
     comparable basis to the amounts reported in the June 30, 2005  consolidated
     financial statements.


NOTE 4  LAND BUILDINGS AND EQUIPMENT
-----  -----------------------------

     Fixed assets at June 30, 2005,  and  December  31, 2004 are  summarized  as
follows:

                                                          2005          2004
                                                     -----------   -----------
     Land                                              1,580,000     1,580,000
     Buildings and Leasehold Improvements              5,449,366     5,082,535
     Furniture, Fixtures and Equipment                 3,866,875     3,450,003
                                                     -----------   -----------
                                                      10,896,241    10,112,538
     Less:  Accumulated Depreciation                   2,931,828     2,643,828
                                                     -----------   -----------
                                                       7,964,413     7,468,710
                                                     ===========   ===========














                                        8



<PAGE>


NOTE  5     LOANS  RECEIVABLE
-------    ------------------

     Loans  receivable  at June 30, 2005 and December  31, 2004,  consist of the
following:


                                                   2005             2004
                                              --------------   --------------
  First Mortgage Loans                           53,531,408       51,965,318
  Construction Loans                             29,855,790       27,146,299
  Consumer Loans                                 14,431,590       14,407,548
  Commercial Loans                               75,772,159       69,267,247
  Credit Line Advances                              861,204          870,529
  Lease Finance                                   1,252,512        1,381,883
                                             ---------------  ---------------

    Gross Loans and Leases Receivable           175,704,663      165,038,824
                                             ---------------  ---------------

  Less:
    Undisbursed Portion of Loans in Process         235,728      (   326,209)
    Net Deferred Loan Origination Fees          (   271,137)     (   254,470)
    Accumulated General Loan Loss Allowance     ( 1,803,387)     ( 1,601,332)
                                             ---------------  ---------------
                                                ( 1,838,796)     ( 2,182,011)
                                             ---------------  ---------------

  Loans and Leases Receivable, Net              173,865,867      162,856,813
                                             ===============  ===============

An  analysis  of the  allowance  for loan and lease  losses at June 30, 2005 and
December 31, 2004 is as follows:

                                                    2005             2004
                                              --------------   --------------
    Balance - Beginning of Period                 1,601,332        1,870,279
    Provision for Loan and Lease Losses             200,000       (   62,000)
    Loans and Leases Charged-Off                          -       (  212,947)
    Charged-Off Loan and Lease Recoveries             2,055            6,000
                                              --------------   --------------

    Balance - End of Period                       1,803,387        1,601,332
                                              ==============   ==============


     At June 30,  2005 the  Company had  non-accrual  loans and leases  totaling
     $739,000 which included  $18,000 in impaired loans compared with $1,261,000
     and $18,000,  respectively,  at December 31, 2004. A loan is impaired when,
     based on current  information  and events,  it is probable that the Company
     will be unable to collect  all  amounts due  according  to the  contractual
     agreement.  The total allowance for loan losses allocated to impaired loans
     was $14,000 at June 30, 2005 and December 31, 2004.  No interest  income on
     impaired  loans was  recognized  for the  periods  ending June 30, 2005 and
     December 31, 2004.  The Company had $180,000 in loans and leases 90 days or
     more  past due and still  accruing  and no  restructured  loans at June 30,
     2005,  compared  to no loans or  leases  90 days or more past due and still
     accruing and no restructured loans at December 31, 2004.




                                        9


<PAGE>


NOTE  6     FEDERAL REGULATION
-------     ------------------

     The capital ratios for State of Franklin Savings Bank are as follows:

                                                           For Capital
                                                             Adequacy
                                                             Purposes
                                                          And To Be Well
                                                         Capitalized Under
                                                         Prompt Corrective
                                         Actual          Action Provision
                                     ----------------    ----------------
In Thousands  (Reviewed)             Amount    Ratio     Amount    Ratio
---------------------------          ----------------    ----------------
As of June 30, 2005:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        28,539    13.06%    >=21,848   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        26,933    12.33%    >=13,109    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       26,933     8.81%    >=15,282    5.0%

As of December 31, 2004:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        25,178    12.08%    >=20,850   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        23,772    11.40%    >=12,510    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       23,772     7.98%    >=14,891    5.0%


The capital ratios for State of Franklin Bancshares, Inc. are as follows:

                                                           For Capital
                                                            Adequacy
                                                            Purposes
                                                         And To Be Well
                                                        Capitalized Under
                                                        Prompt Corrective
                                          Actual        Action Provision
                                     -----------------  -----------------
In Thousands  (Reviewed)             Amount    Ratio    Amount    Ratio
---------------------------          -----------------  -----------------
As of June 30, 2005:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        38,581     17.70%   >=21,799    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        36,778     16.87%   >=13,080     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       36,778     11.99%   >=15,339     5.0%

As of December 31, 2004:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        34,938     16.71%   >=20,908    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        33,337     15.94%   >=12,545     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       33,337     11.16%   >=14,935     5.0%



                                       10
<PAGE>
NOTE 7     EMPLOYEE AND DIRECTOR BENEFIT PLANS
------    ------------------------------------
     EMPLOYEE STOCK OWNERSHIP PLAN

     The company has an employee  stock  ownership  plan (the  "ESOP") for those
     employees who meet the  eligibility  requirements of the plan. The ESOP was
     established in 1997. The ESOP currently has two loans  established  for the
     purpose of purchasing shares in the Company for the plan.

     In November 2001, the ESOP loans were  consolidated  into a seven year term
     loan from the  Company in the amount of  $1,071,093  with a fixed  interest
     rate of 6.00%.  Note  payments  are  $15,218 per month for 83 months plus a
     final principal  payment of $24,092.  The note balance  outstanding at June
     30,  2005 was  $567,604.  In November  2001,  the  Company  also  granted a
     $300,000 line of credit to the ESOP for the purchase of  additional  shares
     of stock in the  Company as it becomes  available.  The  interest  rate for
     balances  outstanding  on the line of credit  is 6% with a five year  term.
     Interest  is  paid  monthly  with  principal  payments  made as  funds  are
     available.  At June 30, 2005, no balances were  outstanding for advances on
     the line of credit.

     Shares owned by the ESOP at June 30, 2005 totaled 186,829.  ESOP shares are
     maintained  in  a  suspense   account  until   released  and  allocated  to
     participants'  accounts. The release of shares from the suspense account is
     based on the  principal  paid in the  year in  proportion  to the  total of
     current year and remaining  outstanding debt. Allocation of released shares
     to  participants'  accounts is done as of December 31. Shares allocated and
     remaining in suspense were as follows:

                                                         June 30,   December 31,
                                                             2005           2004
                                                    -------------  -------------
      Number of Shares
        Released and Allocated since Inception             46,073         46,073
        Suspense                                           38,887         44,641

      Fair Value
        Released and Allocated since Inception          1,163,343      1,013,606
        Suspense                                          981,897        982,102

     The expense  recorded by the  Company is based on cash  contributed  to the
     ESOP during the year in amounts determined by the Board of Directors,  plus
     the excess of fair value of shares  released and allocated  over the ESOP's
     cost of  those  shares.  The  Company's  contributions  to the  ESOP are as
     follows:

                                                         June 30,   December 31,
                                                             2005           2004
                                                     -------------  ------------
      Compensation Expense                                222,000        444,000
      Contributions                                       222,000        444,000


     No dividends  have been declared on the Company's  stock.  If dividends are
     paid, the ESOP administrators will determine whether dividends on allocated
     and  unallocated  shares  will be used  for  debt  service.  Any  allocated
     dividends  used will be replaced with common stock of equal value.  For the
     purpose of computing  earnings per share,  all ESOP shares  committed to be
     released are considered outstanding.

     The released  Company  stock will be allocated to employees  based on their
     salaries.  Generally,  all employees who work over 1,000 hours are eligible
     for the plan  after one year of  service.  Employees  will be vested  after
     seven years of service.  This plan includes a 401(k)  feature that began in
     1998,  which  allows  employees  to defer up to 15% of their  salary and is
     matched  by the  Company  up to 6%. In  addition,  the  Company  may make a
     discretionary contribution to the ESOP.

     STOCK OPTION PLANS
<TABLE>
<CAPTION>
                                                                                            Weighted
                                                                                            Average
                                                                      Awarded               Exercise
                                                                        And                  Price
                                                                    Unexercised   Vested      Per
                                                                      Options     Options    Share
                                                 --------------------------------------------------
<S>                                              <C>                   <C>       <C>         <C>
     Options Granted - Outside Directors         January 1, 2005        94,014    88,323     $12.79
                                                 During 2005             7,000    11,698     $25.25
     Options Granted - Management                January 1, 2005       249,423   193,011     $13.43
                                                 During 2005             9,279    15,234     $25.25
                                                                       -------   -------
     Options Outstanding - June 30, 2005                               359,716   308,266     $13.80
                                                                       =======   =======
</TABLE>
                                                   11

<PAGE>
NOTE 8     DEPOSITS
-------   ----------

     Deposit balances are summarized as follows:

<TABLE>
<CAPTION>
                                             June 30, 2005                December 31, 2004
                                    -----------------------------  -----------------------------
                                      Rate     Amount     Percent    Rate     Amount     Percent
                                    ------- -----------  --------  ------- -----------  --------
     <S>                               <C>  <C>            <C>        <C>  <C>            <C>
     Passbook                          1.34  50,159,532     22.24     1.13  72,157,046     33.69
     Interest-Free Checking              --  18,942,932      8.40       --  15,371,046      7.18
     NOW                                .25  17,841,891      7.91      .25  20,439,053      9.54
     Money Market Deposit              1.45  20,880,257      9.26     1.07  22,156,509     10.35
                                            -----------  --------          -----------  --------
                                            107,824,612     47.81          130,123,654     60.76
                                            -----------  --------          -----------  --------
     Fixed Term Certificate Accounts
      Balances $100,000 or greater     3.39  36,219,334     16.06     2.84  22,745,289     10.62
      Balances less than $100,000      3.19  81,499,152     36.13     2.66  61,286,650     28.62
                                            -----------  --------          -----------  --------
                                            117,718,486     52.19           84,031,939     39.24
                                            -----------  --------          -----------  --------
                                            225,543,098    100.00          214,155,593    100.00
                                            ===========  ========          ===========  ========
</TABLE>

The contractual  maturity of certificate  accounts at June 30, 2005 and December
31, 2004, is as follows:

          Period Ending June 30, 2005              Year Ending December 31, 2004
       --------------------------------            -----------------------------
          2005             36,033,900                2005            52,996,714
          2006             54,556,444                2006            20,586,376
          2007             21,033,080                2007             4,800,025
          2008              4,362,987                2008             4,138,797
          2009 and After    1,732,075                2009 and After   1,510,027
                          -----------                                ----------
                          117,718,486                                84,031,939
                          ===========                                ==========

NOTE 9     FEDERAL HOME LOAN BANK ADVANCES
-------    -------------------------------

     The contractual maturity of FHLB advances at June 30, 2005 is as follows:


         2005       15,190          2010             8,034,555
         2006       31,091          2011            19,035,481
         2007       31,923          2012             5,036,431
         2008    3,032,777          2013            10,037,879
         2009       33,654          2014 and after     876,699


     Convertible  fixed rate advances were  $45,000,000  at June 30, 2005 and at
     December 31, 2004.  The  convertible  fixed rate  advances have an original
     maturity  of 10 years with an option  held by FHLB to convert to a variable
     rate tied to 3-month LIBOR  beginning 1 to 3 years from the original  issue
     date. If converted to a variable rate the bank  maintains the option to pay
     off the  advance  or  continue  at the  variable  rate  over  the  original
     contractual  maturity of the  advance.  CRA  mortgage  match  advances  are
     amortized over a 30-year period and totaled $1,165,680 at June 30, 2005 and
     $1,180,671  at December  31, 2004.  The average  rate on FHLB  advances was
     4.56% at both June 30, 2005 and December 31, 2004.

     The  Savings  Bank  pledges as  collateral  for these  borrowings  selected
     qualifying  mortgage  loans and  securities (as defined) under an agreement
     with the FHLB. Loans and securities  pledged at June 30, 2005 totaled $66.9
     million in residential  mortgage  loans and $7.9 million in securities.  At
     December 31, 2004 there were approximately  $66.9 million in mortgage loans
     and $9.4 million in securities pledged for FHLB borrowings.


NOTE 10     INVESTMENT SECURITIES
-------     ---------------------

     The amortized cost and fair value of investment securities held-to-maturity
     and available-for-sale at June 30, 2005, by contractual maturity, are shown
     below.  Expected  maturities  differ from  contractual  maturities  because
     issuers may have the right to call or prepay  obligations  without  call or
     prepayment  penalties.  Maturities  for  mortgage  backed  securities  with
     scheduled  contractual  payments are based on the weighted  average life of
     the remaining payments.


                                       12


<PAGE>


<TABLE>
<CAPTION>
                                                              Gross       Gross     Estimated
                                             Amortized   Unrealized  Unrealized       Market
                                                 Cost         Gains      Losses       Value
                                             ----------     -------   ----------    -----------
<S>                                          <C>          <C>          <C>          <C>
     Available-for-Sale:
          Mortgage Backed Securities:
               After one year
                 but within five years          319,212       1,075          246       320,041
               After five years
                 but within ten years         1,234,809           -        4,267     1,230,542

              Municipal Securities Maturing:
               Within one year                  140,000       1,882           --       141,882
               After one year
                 but within five years        1,454,192      39,795           --     1,493,987
               After five years
                 but within ten years         9,104,698     377,253           --     9,481,951
               After ten years
                 but within fifteen years     5,949,944     389,785           --     6,339,729
               After fifteen years
                 but within twenty years      3,098,968     221,353           --     3,320,321
               After 20 years                 1,137,493      52,100        4,337     1,185,256

         Corporate Securities Maturing:
               Within one year                1,308,986       1,245           --     1,310,231
               After one year
                 but within five years        3,000,000          --      267,243     2,732,757
               After twenty years             1,730,380     143,625           --     1,874,005

          Equity Securities: (Preferred
            Stock in US Government Agencies)
                Callable within one year     21,072,044          --    4,234,044    16,838,000
                Callable after one year
                  but within five years       4,414,150          --      178,637     4,235,513
                Callable after five years
                  but within ten years        1,000,000         800            -     1,000,800

          Other Equity Stock:
               After 20 years                   318,155      35,345           --       353,500
                                             ----------   ---------    ---------   -----------
                  Total Available-for-Sale   55,283,031   1,264,258    4,688,774    51,858,515
                                             ==========   =========    =========   ===========
Held-to-Maturity:
          United States Government
            Agency Securities Maturing:
                After one year
                 but within five years        7,019,848          --      187,470     6,832,378

          Mortgage Backed Securities:
                After one year
                 but within five years        5,531,626         666       43,128     5,489,164
               After five years
                 but within ten years        10,855,146          --       45,075    10,810,071
               After fifteen years
                 but within twenty years        408,158       2,182           --       410,340
               After twenty years             4,269,712       7,843       50,681     4,226,874

          Municipal Securities Maturing:
                After one year
                 but within five years        1,216,646      17,620          351     1,233,915
               After five years
                 but within ten years           429,982       8,751           --       438,733
               After ten years
                 but within fifteen years       340,000         522           --       340,522
               After twenty years             2,612,159       2,778        2,366     2,612,571

       Corporate Securities Maturing:
               Within one year                1,130,625       6,907          260     1,137,272
               After one year
                 but within five years        7,242,942      23,088       41,607     7,224,423
</TABLE>

                                       13


<PAGE>



                                               Gross        Gross     Estimated
                               Amortized  Unrealized   Unrealized       Market
                                   Cost        Gains       Losses       Value
                              ----------     -------    ----------  -----------
After five years
  but within ten years           984,660          --       15,989       968,671
After twenty years             5,196,324     124,356        6,164     5,314,516
                               ----------     -------    ---------   -----------
Total Held-to-Maturity        47,237,828     194,713      393,091    47,039,450
                               ==========     =======    =========   ===========

     Securities   sold  under  agreement  to  repurchase  are  offered  to  cash
     management  customers as an automated,  collateralized  investment account.
     Under these  transactions,  securities are delivered to the  counterparty's
     custody  account.  Securities held in custody accounts at June 30, 2005 and
     December 31, 2004 totaled $2,037,355 and $2,005,365, respectively.

     Information  pertaining to securities with gross unrealized  losses at June
     30,  2005,  aggregated  by  investment  category  and  length  of time that
     individual securities have been in a continuous loss position, follows:
<TABLE>
<CAPTION>
                                             Less than Twelve Months       Over Twelve Months
                                             -----------------------    -----------------------
                                              Gross                        Gross
                                              Unrealized     Fair       Unrealized       Fair
                                              Losses         Value         Losses        Value
                                             --------     ----------    -----------   ----------
          <S>                                 <C>          <C>           <C>          <C>
          Available-for-Sale
             Mortgage Backed Securities         2,427        805,435         2,085       557,870
             Municipal Securities                   -              -         4,337       704,485
             Corporate Securities             267,243      2,732,757             -             -
             Marketable Equity Securities      18,000      1,982,000     4,394,682    19,091,513
                                             --------      ---------     ---------    ----------
               Total Available-for-Sale       287,670      5,520,192     4,401,104    20,353,868

          Held-to-Maturity
             US Government Agencies                 -              -       187,470     6,832,378
             Mortgage Backed Securities         5,522      1,548,417       133,362    17,855,155
             Municipal Securities                   -              -         2,718       637,786
             Corporate Securities              52,022      6,600,775        11,997     2,249,826
                                             --------      ---------     ---------    ----------
               Total Held-to-Maturity          57,544      8,149,192       335,547    27,575,145
</TABLE>

     Management  believes all  unrealized  losses as of June 30, 2005  represent
     temporary  impairment.  The unrealized  losses have resulted from temporary
     changes  in the  interest  rate  market  and  not  as a  result  of  credit
     deterioration.  Management  does not anticipate  selling the securities for
     losses,  and  State of  Franklin  has  sufficient  cash,  investments  with
     unrealized  gains and unused  lines of credit to provide  resources to meet
     liquidity needs.

NOTE 11     EARNINGS PER SHARE
-------     ------------------

     Earnings per share for three and six months  ended June 30, 2005,  compared
     with the same period in 2004, are as follows:

<TABLE>
<CAPTION>
                                                Three Months Ended         Six Months Ended
                                                      June 30,                 June 30,
                                                 2005        2004          2005        2004
                                              ---------   ---------     ---------   ---------
<S>                                          <C>          <C>           <C>         <C>
Net Income                                   2,275,187      575,803     2,830,298   1,128,234
Average Basic Shares Outstanding             1,436,821    1,397,269     1,430,917   1,396,486
Basic Earnings Per Share                          1.58          .41          1.98         .81
                                             =========    =========     =========   =========

Net Income                                   2,275,187      575,803     2,830,298   1,128,234
Average Basic Shares Outstanding             1,436,821    1,397,269     1,430,917   1,396,486
Dilutive Effect Due to Stock Options           163,174      135,857       153,324     126,238
                                             ---------    ---------     ---------   ---------
Average Shares Outstanding, as Adjusted      1,599,995    1,533,126     1,584,241   1,522,724
Diluted Earnings Per Share                        1.42          .38          1.79         .74
                                             =========    =========     =========   =========
</TABLE>
                                       14
<PAGE>

NOTE 12     SUBSEQUENT EVENTS
-------     -----------------

     On April 6, 2005,  the Company's  Board of Directors  announced that it has
     approved a proposed going private transaction by merging the Company with a
     newly formed  subsidiary  of the Company.  The proposed  transaction  would
     reduce the number of  stockholders  of record from  approximately  1,200 to
     approximately  250.  Following the proposed  merger,  the surviving  entity
     would continue  operations of the Company as a privately  held  corporation
     that  would  not be  required  to file  periodic  public  reports  with the
     Securities and Exchange Commission.

     The  terms of the  proposed  merger  are  expected  to  provide  that  each
     stockholder  of record of the  Company  beneficially  owning  3,000 or less
     common  shares will  receive cash for shares at a price equal to $25.25 per
     share of the common  stock,  which is the price the Board of Directors  has
     established based on an independent valuation by a qualified valuation firm
     and other factors. Each stockholder of record beneficially owning more than
     3,000 common  shares will continue to hold the same number of shares of the
     surviving  corporation  after the merger and will not  receive any cash for
     shares.  The Company intends to finance the proposed merger with $8 million
     of Company cash in hand from a trust preferred  offering  completed in 2001
     and a $5 million upstream dividend payment from the Bank to the Company.

     Consummation of the proposed going private  transaction is conditioned upon
     the filing of the requisite  reports with the SEC, review by and consent of
     the Federal  Reserve,  approval of the  Company's  stockholders,  and other
     conditions.  Therefore,  there is no assurance that the transaction will be
     consummated on the terms described or at all.


ITEM 2 MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS
       OF OPERATIONS
--------------------------------------------------------------------------------
     GENERAL
     -------

     The   following   discussion   and   analysis  is  intended  to  assist  in
     understanding the financial  condition and the results of operations of the
     Company.  State of  Franklin  Savings  Bank  (Savings  Bank)  and  State of
     Franklin Leasing Corporation (Leasing Corp) represents virtually all of the
     assets of State of Franklin Bancshares,  Inc. (Company). The Company places
     an emphasis on an  integrated  approach  to its balance  sheet  management.
     Significant  balance sheet components of investment  securities,  loans and
     sources of funds are managed in an integrated manner with the management of
     interest rate risk, liquidity,  and capital.  These components are examined
     below.

     BALANCE SHEET REVIEW
     --------------------

     At June 30,  2005,  assets of State of Franklin  Bancshares,  Inc.  totaled
     $310.9 million reflecting an increase of $14.2 million or 5% since December
     31,  2004.  The  growth in assets  has been  funded  primarily  by an $11.4
     million  increase  in  deposits  and a $2.8  million  increase  in retained
     earnings.

     LOANS
     -----

     Loans  outstanding  increased $11.5 million,  or 7%, from $164.8 million at
     December 31, 2004 to $176.3 million at June 30, 2005.  First mortgage loans
     increased $1.6 million,  commercial and  construction  loans increased $9.1
     million,  and consumer loans increased  $15,000.  The loan portfolio mix at
     June 30, 2005 consists of 30% residential  mortgages,  44% commercial,  17%
     real estate construction, and 9% consumer loans.

     INVESTMENT SECURITIES
     ---------------------

     Investment   securities  totaled  $99.1  million  at  June  30,  2005.  The
     investment  portfolio  at quarter  end  consisted  of $7.0  million in debt
     securities issued by the U. S Government or Federal Agencies, $22.6 million
     in mortgage backed securities, $26.6 million in securities issued by state,
     county, or  municipalities,  $20.5 million in corporate  securities,  $22.1
     million in  preferred  stock  issued by Federal  Agencies,  and $354,000 in
     other equity securities.

     At June 30, 2005,  securities  categorized  as  available-for-sale  totaled
     $51.9 million while the  held-to-maturity  securities totaled $47.2 million
     compared  to $53.7  million  in  available-for-sale  and $49.7  million  in
     held-to-maturity   at  December   31,   2004.   At  June  30,   2005,   the
     available-for-sale  portfolio  had net  unrealized  losses of $3.4  million
     while  our  held-to-maturity  securities  had  $198,000  in net  unrealized
     losses.

     NON-PERFORMING ASSETS
     ---------------------

     At June  30,  2005 the  Company  had  nonaccrual  loans  totaling  $739,000
     compared  with $1.2 million at December 31, 2004.  The reserve for loan and
     lease losses was  $1,803,387 at June 30, 2005, or 1.03% of loans and leases
     outstanding,  net of unearned  income and loans held for sale,  compared to
     $1,601,332 or .97% at December 31, 2004.  Management believes the allowance
     for loan losses is adequate to provide for potential loan losses.



                                       15
<PAGE>
     DEPOSITS
     --------

     Total deposits at June 30, 2005 of $225.5 million, reflected an increase of
     $11.4  million or a 5% increase  from $214.2  million at December 31, 2004.
     Non-interest  bearing  demand  deposits  totaled  $18.9 million at June 30,
     2005, an increase of $3.6 million from December 31, 2004.  Interest bearing
     deposits increased $7.8 million to $206.6 million at June 30, 2005.

     CAPITAL
     -------

     Tier 1 capital for the Savings Bank at June 30, 2005 was $26.9 million.  At
     June  30,  2005,  all  capital  ratios  were in  excess  of the  regulatory
     minimums,  with the Savings Bank's Tier 1, total  risk-based,  and leverage
     ratios of 12.33%, 13.06% and 8.81%, respectively.

     Tier 1 capital for the Company at June 30,  2005,  was $36.8  million  with
     Tier 1,  total  risk-based,  and  leverage  ratios of 16.87%,  17.70%,  and
     11.99%, respectively.

     LIQUIDITY
     ---------

     The purpose of liquidity  management  is to ensure that there is sufficient
     cash flow to satisfy  demands for credit,  deposit  withdrawals,  and other
     corporate needs.  Traditional sources of liquidity include asset maturities
     and growth in core deposits. Other sources of funds such as securities sold
     under  agreements to  repurchase,  negotiable  certificates  of deposit and
     other  liabilities  are  sources  of  liquidity  that the  Company  has not
     significantly used. The Company had unused sources of liquidity in the form
     of unused  federal  funds lines of credit and an unused line of credit with
     the Federal Home Loan Bank of Cincinnati.

     EARNINGS REVIEW
     ----------------

     The Company had net income of  $2,275,000  for the three months ending June
     30, 2004,  compared with $576,000 for the same period last year,  resulting
     in an increase of 295%.  Return on average  assets was 2.97% and the return
     on average  equity was 31.80%  for the three  months  ended June 30,  2005,
     compared  with .75% and 9.41%,  respectively,  for the same period in 2004.
     For the six months ending June 30, 2005, net income was $2,830,000 compared
     with  $1,128,000  for the same period ending June 30, 2004  resulting in an
     increase of 151%.  Return on average  assets and average  equity were 1.89%
     and 20.78%,  respectively,  compared  with .75% and 9.17% for the six month
     period  ended June 30, 2004.  For the six months  ended June 30, 2005,  net
     income per diluted  share was $1.79  compared to earnings per share of $.74
     for the same period in 2004.

     Noninterest  income increased  $2,673,000,  or 397%,  during the six months
     ended June 30,  2005,  compared to the same period last year as a result of
     increases in other fees and service charges,  realized gains on securities,
     real estate  commission  income,  and insurance  commissions.  Contributing
     significantly  to the increase was the stock buyout of the  Company's  data
     processing service provider,  Intrieve Corporation,  located in Cincinnati,
     Ohio, in which the Company owned a significant  number of shares. Net gains
     on loans  sold and  rental  income  declined  from the prior  year due to a
     reduction in the number of existing homes being  refinanced and a reduction
     in space available for rent at the Company's main office, respectively.

     Noninterest expense was $3,701,000 for the six months ending June 30, 2005,
     an  increase  of  $673,000,  or 22% over the 2004  period,  resulting  from
     increases  in  compensation  and  related  benefits,   occupancy   expense,
     advertising,  data processing, and other operating expenses.  Furniture and
     equipment expense declined from the prior period.

     NET INTEREST INCOME
     -------------------

     Interest  income and  interest  expense  both  increased  from 2004 to 2005
     primarily resulting from assets and liabilities  repricing with recent rate
     increases by the Federal  Reserve Bank.  Net interest  income of $4,700,000
     for the six months ended June 30, 2005  reflects an increase of $862,000 or
     23% over the same  period  last year.  For the six months  ending  June 30,
     2005,  average  earning  assets  decreased $3.3 million or 1% while average
     interest bearing  liabilities  declined $8.1 million,  or 3%, compared with
     the same period in 2004.  Offsetting  the  negative  effect on net interest
     income  resulting from the decline in average earning assets were increases
     in loans outstanding,  when compared to lower yielding asset  alternatives,
     and increases in interest-free sources of funds. Consequently,  the taxable
     equivalent  yield on earning assets  increased 80 basis points to 5.99% for
     the first six months of 2005 compared with the same period in 2004.  During
     the same period the cost on interest bearing liabilities increased 18 basis
     points to 2.67%  resulting in the taxable  equivalent  net interest  margin
     based on average earning assets increasing 63 basis points to 3.59% for the
     six months  ending June 30, 2005 compared with 2.91% for the same period in
     2004.

                                       16
<PAGE>

    PROVISION FOR LOAN LOSSES
    -------------------------

     During the six months ended June 30, 2005,  the provision for possible loan
     losses was  $200,000  compared  with $20,000 for the same period last year.
     There were $2,000 in loan or lease  recoveries and no  charge-offs  for the
     six  months  ended  June 30,  2005,  compared  to  $95,000 in loan or lease
     charge-offs net of recoveries during the same period in 2004. The allowance
     for possible loan losses  represented 1.03% of total loans, net of mortgage
     loans held-for-sale,  at June 30, 2005, compared to 1.17% at June 30, 2004.
     Management  considers the allowance for loan losses to be adequate to cover
     losses inherent in the loan portfolio.


     PROVISION FOR INCOME TAXES
    ---------------------------

     For the six months ended June 30, 2005, the provision for federal and state
     income  taxes was  $1,315,000,  an  increase  of  $981,000  from 2004.  The
     increase  is due to the  increase  in taxable  income  compared to the same
     period in 2004.


     NONINTEREST INCOME
    -------------------

     The Company's noninterest income was $3,347,000 during the six months ended
     June 30, 2005, an increase of $2,673,000 or 397% from the  comparable  2004
     period.  During 2004,  other fees and service  charges,  realized  gains on
     securities,  real  estate  sales  commissions,  and  insurance  commissions
     increased $43,000, $2,575,000,  95,000, and $1,000, respectively.  Net gain
     on loans sold declined $27,000, and rental income declined $15,000.


     NONINTEREST EXPENSE
     --------------------

     Noninterest expense totaled $3,701,000 for the six month period ending June
     30, 2005,  an increase of $673,000,  or 22%,  over the same period in 2004.
     The  increase was the result of increases  in  compensation  and  benefits,
     occupancy  expense,  advertising,  data  processing,  and  other  operating
     expenses of $333,000, $33,000, $51,000, $3,000, and $258,000, respectively.
     During the same period, furniture and equipment expense declined $6,000.


ITEM 3  CONTROLS AND PROCEDURES
------  -----------------------

     (a)  Evaluation  of  Disclosure  Controls  and  Procedures.  The  Company's
     President and its Chief Executive  Officer have evaluated the effectiveness
     of the  design and  operation  of the  Company's  disclosure  controls  and
     procedures (as defined in Exchange Act Rule  13a-14(c)) as of June 30,2005.
     Based on that  evaluation,  the President and the Chief  Executive  Officer
     have  concluded that the Company's  disclosure  controls and procedures are
     effective to ensure that material  information  relating to the Company and
     the Company's  consolidated  subsidiaries is made known to such officers by
     others within these entities, particularly during the period this quarterly
     report was prepared,  in order to allow timely decisions regarding required
     disclosure.


     (b)  Changes in  Internal  Controls.  There  have not been any  significant
     changes in the Company's  internal  controls or in other factors that could
     significantly  affect  these  controls  subsequent  to the  date  of  their
     evaluation.



                                       17


<PAGE>


PART II - OTHER INFORMATION


     ITEM 1. LEGAL PROCEEDINGS

             None


     ITEM 2. CHANGES IN SECURITIES

             None


     ITEM 3. DEFAULT UPON SENIOR SECURITIES

             None


     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

             None


     ITEM 5. OTHER INFORMATION

             None


     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits

          31.1 Certification of Randal R. Greene, President of State of Franklin
               Bancshares,  Inc.  pursuant to Section 301 of the  Sarbanes-Oxley
               Act of 2002.

          31.2 Certification of Charles E. Allen, Jr., the Chairman of the Board
               and Chief Executive Officer of State of Franklin Bancshares, Inc.
               pursuant to Section 301 of the Sarbanes-Oxley Act of 2002.


          32.1 Certification of Randal R. Greene, President of State of Franklin
               Bancshares,  Inc.  pursuant to Section 906 of the  Sarbanes-Oxley
               Act of 2002.

          32.2 Certification of Charles E. Allen, Jr., the Chairman of the Board
               and Chief Executive Officer of State of Franklin Bancshares, Inc.
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


          (b)  The  Company  did not file any  reports  on Form 8-K  during  the
               quarter  ended  June 30,  2005,  except  an 8-K on April 8,  2005
               attaching a press release  related to the proposed  going private
               transaction.




                                       18

<PAGE>



                                   SIGNATURES


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.





                                              STATE OF FRANKLIN BANCSHARES, INC.
                                              ----------------------------------
                                                      (Registrant)





      August 9, 2005                           /s/Randal R. Greene
---------------------------                   ----------------------------------
         (Date)                               Randal R. Greene, President





      August 9, 2005                          /s/Charles E. Allen, Jr.
---------------------------                   ----------------------------------
         (Date)                               Charles E. Allen, Jr.
                                              Chairman of the Board
                                              and Chief Executive Officer
                                              (Principal Executive, Financial
                                              and Accounting Officer)










                                       19