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:    SEPTEMBER 30, 2004
                                                  --------------------

                                       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
                                         ----

                                    1,465,512
                   ------------------------------------------
    (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF NOVEMBER 10, 2004)


           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
                     SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003 (AUDITED)

                  CONSOLIDATED STATEMENTS OF INCOME
                     THREE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) AND 2003 (UNAUDITED)    4
                     NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) AND 2003 (UNAUDITED)     5

                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                   6
                     NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
                     AND YEAR ENDED DECEMBER 31, 2003 (AUDITED)

                  CONSOLIDATED STATEMENTS OF CASH FLOWS                                        7
                     NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) AND 2003 (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                                                           17

        ITEM 2.   CHANGES IN SECURITIES                                                       17

        ITEM 3.   DEFAULT UPON SENIOR SECURITIES                                              17

        ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                         17

        ITEM 5.   OTHER INFORMATION                                                           17

        ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K                                            17

</TABLE>









                                               2








<PAGE>



PART 1  -  FINANCIAL INFORMATION

         ITEM 1.   FINANCIAL STATEMENTS

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

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                                                                 SEPTEMBER 30,       DECEMBER 31,
                             ASSETS                           2004 - UNAUDITED     2003 - AUDITED
-------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>
Cash and Due from Banks                                          $   4,465,332          3,764,363
Federal Funds Sold                                                  16,545,000         25,040,000
Short-Term Interest Bearing Deposits                                 2,941,813          3,336,670
-------------------------------------------------------------------------------------------------
   Total Cash and Cash Equivalents                                  23,952,145         32,141,033
-------------------------------------------------------------------------------------------------
Investments - HTM
   (Estimated Market 2004 - $51,344,880 and 2003 - $34,274,290)     51,148,831         34,031,676
Investments - AFS                                                   57,140,933         63,375,496
Loans Held for Sale                                                    979,300            413,179
Loans and Leases Receivable                                        157,182,401        150,646,605
   Less: Allowance for Loan and Lease Losses                      (  1,726,839)      (  1,870,279)
-------------------------------------------------------------------------------------------------
   Loans and Leases Receivable, Net                                155,455,562        148,776,326
-------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net                                     1,548,725          1,366,640
Land, Buildings & Equip at Cost Less Accum Depr
   of $2,523,346 in 2004 and $2,091,874 in 2003                      7,260,147          6,218,358
Prepaid Expense and Accounts Receivable                                176,352            108,260
Deferred Tax Assets                                                  1,339,545          1,141,342
FHLB Stock                                                           2,427,400          2,354,800
Investment in Service Bureau at Cost                                   815,009            815,009
Other Real Estate Owned                                                897,412          1,152,919
Other Assets                                                           150,120            159,000
-------------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                   $ 303,291,481        292,054,038
=================================================================================================
             LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits                                           $  15,077,622         12,114,590
Interest-Bearing Deposits                                          206,695,593        209,877,896
Advances to Borrowers for Taxes and Insurance                          273,222            103,632
Accrued Interest on Deposits                                           121,175            141,757
Accrued State and Federal Taxes                                    (    73,164)       (   133,129)
Other Accounts Payable and Accrued Expenses                            730,606            537,849
Repurchase Agreements                                                  216,984            536,419
FHLB Long-Term Advances                                             46,188,094         36,210,071
Deferred Credits on REO                                                211,750            173,996
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                         $ 269,441,882        259,563,081
-------------------------------------------------------------------------------------------------

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

STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value                                        1,465,512          1,465,512
Paid-in Capital                                                     14,251,461         14,251,461
Accumulated Other Comprehensive Income                             ( 1,288,638)       (   797,592)
Retained Earnings                                                   12,100,002         10,356,571
  Less: Employee Stock Ownership                                   (   678,738)       (   784,995)
-------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                $  25,849,599         24,490,957
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 303,291,481        292,054,038
=================================================================================================
</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 SEPTEMBER 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2004 - UNAUDITED  2003 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                     <C>               <C>
Interest and Fees on Loans                              $    2,395,551         2,389,306
Other Interest Income                                        1,269,507           970,352
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 3,665,058         3,359,658
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                           970,030         1,098,680
Interest on Repurchase Agreements                                1,121               984
Interest on Short-Term Debt                                        194               113
Interest on Long-Term Debt                                     529,116           439,879
Interest on Subordinated Debentures                            118,044           107,502
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                1,618,505         1,647,158
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           2,046,553         1,712,500
PROVISION FOR LOAN LOSSES                                      (38,000)         (100,892)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            2,008,553         1,611,608
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 160,141           144,598
Net Gain on Loans Sold                                          65,608           291,219
Realized Gains on Securities                                         -               229
Real Estate Sales Commission Income                            155,150            82,141
Insurance Commission Income                                     12,640            25,514
Rental Income, Net                                              18,064            26,093
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                      411,603           569,794
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                              749,441           715,471
Occupancy Expenses                                             164,162           122,122
Furniture and Equipment Expense                                127,346            99,794
Advertising                                                     87,634            55,529
Data Processing Expense                                        144,183           143,094
Other                                                          316,985           207,682
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  1,589,751         1,343,692
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                                830,405           837,710
PROVISION FOR INCOME TAXES                                    (215,210)         (168,614)
----------------------------------------------------------------------------------------
       NET INCOME                                       $      615,195           669,096
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                 $         0.44              0.48
  DILUTED                                                         0.40              0.44
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,398,918         1,391,454
  DILUTED                                                    1,535,461         1,508,164
========================================================================================
</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

                                                         NINE MONTHS ENDED SEPTEMBER 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2004 - UNAUDITED  2003 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                    <C>               <C>
Interest and Fees on Loans                             $     7,192,889         7,899,302
Other Interest Income                                        3,593,523         2,734,083
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                10,786,412        10,633,385
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         3,044,120         3,343,486
Interest on Repurchase Agreements                                6,069             8,138
Interest on Short-Term Debt                                        844               169
Interest on Long-Term Debt                                   1,515,742         1,313,148
Interest on Subordinated Debentures                            335,848           325,923
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                4,902,623         4,990,864
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           5,883,789         5,642,251
PROVISION FOR LOAN LOSSES                                   (   58,000)       (  392,362)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            5,825,789         5,250,159
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 425,474           404,527
Net Gain on Loans Sold                                         236,388           750,112
Realized Gain on Securities                                          -               460
Real Estate Sales Commission Income                            316,632           222,052
Insurance Commission Income                                     41,787            70,152
Rental Income, Net                                              65,075            62,944
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                    1,085,356         1,510,247
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                            2,192,909         2,055,272
Occupancy Expenses                                             368,131           322,694
Furniture and Equipment Expense                                381,241           263,816
Advertising                                                    223,702           127,215
Data Processing Expense                                        462,388           399,502
Other                                                          990,167           735,008
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  4,618,538         3,903,507
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                              2,292,607         2,856,899
PROVISION FOR INCOME TAXES                                  (  549,178)       (  742,105)
----------------------------------------------------------------------------------------
       NET INCOME                                      $     1,743,429         2,114,794
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                $          1.25              1.52
  DILUTED                                                         1.14              1.42
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,397,302         1,387,058
  DILUTED                                                    1,527,229         1,488,847
========================================================================================
</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 NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2003 (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, 2002           1,465,512   14,251,461     252,106   7,711,128  (1,058,450)     22,621,757

ESOP Shares Allocated                         --           --          --          --     273,455         273,455

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Gains
        Arising During the Period
         (Net of $656,269 Income Tax Benefit) --           --  (1,057,399)         --          --      (1,057,399)
      Less: Reclassification Adjustment
         (Net of $4,780 Income Tax)           --           --       7,701          --          --           7,701
                                                                                                     ------------
                                                                                                       (1,049,698)

  Net Income                                  --           --          --   2,645,445          --       2,645,445
                                                                                                     ------------
        Total Comprehensive Income            --           --          --          --          --       1,595,747
                                    ------------   ----------   ---------  ----------   ---------    ------------
Balance at December 31, 2003           1,465,512   14,251,461  (  797,592) 10,356,573   ( 784,995)     24,490,959

ESOP Shares Allocated                         --           --          --          --     106,257         106,257

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Losses
        Arising During the Period
          (Net of $315,188 Income Tax Benefit)--           --    (507,839)         --          --        (507,839)
      Less: Reclassification Adjustment
          (Net of $10,422 Tax)                --           --      16,793          --          --          16,793
                                                                                                     ------------
                                                                                                         (491,046)

  Net Income                                  --           --          --   1,743,429          --       1,743,429
                                                                                                     ------------
        Total Comprehensive Income            --           --          --          --          --       1,252,383
                                    ------------   ----------   ---------  ----------   ----------   ------------
Balance at September 30, 2004          1,465,512   14,251,461  (1,288,638) 12,100,002   (  678,738)    25,849,599
                                    ============   ==========   =========  ==========   ==========   ============

</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>
                                                                                 NINE MONTHS ENDED SEPTEMBER 30,
                                                                               ----------------------------------
                                                                               2004 - UNAUDITED  2003 - UNAUDITED
                                                                               ----------------  ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>                <C>
  Net Income                                                                      $   1,743,429        2,114,794
  Items Not Affecting Cash:
    Depreciation                                                                        431,472          277,448
    (Increase) Decrease in Accrued Interest                                            (182,085)          30,062
    Deferred Income Taxes (Benefit)                                                      77,374         (102,975)
    Provision for Loan and Lease Losses                                                  58,000          392,362
    (Increase) Decrease in Prepaid Expenses and Accounts Receivable                     (68,092)          52,943
    (Decrease) in Interest Payable                                                      (20,582)         (37,225)
    Increase (Decrease) in State and Federal Taxes Payable                               59,965         (228,257)
    Increase (Decrease) in Other Accounts Payable and Accrued Expenses                  192,757          (12,160)
    Increase in Deferred Loan Fees, Net                                                  16,870           17,429
    Realized (Gain) on Securities                                                             -             (460)
    Discount Accretion                                                                 (172,301)        (127,151)
    Premium Amortization                                                                477,789          464,154
    Increase in Deferred Gain on Sale of REO                                             37,754                -
    Earned ESOP Shares                                                                  106,257          239,083
    FHLB Stock Dividends                                                                (72,600)         (68,200)
    Net (Increase) in Loans Held for Sale                                              (566,121)        (187,257)
-----------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                                       2,119,886        2,824,590
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Held-to-Maturity Investments                                          (30,692,594)     (23,289,301)
  Purchase of Available-for-Sale Investments                                                  -      (14,014,267)
  Proceeds from Maturities of Held-to-Maturity Investments                            8,668,216        3,495,000
  Proceeds from Maturities of Available-for-Sale Investments                          3,676,941        4,423,358
  Principal Payments on Mortgage-backed Securities - HTM                              4,671,389        8,040,088
  Principal Payments on Mortgage-backed Securities - AFS                              1,730,227        2,726,312
  (Increase) Decrease in Loans Receivable, Net                                       (6,498,599)      10,207,136
  Purchases of Premises and Equipment                                                (1,473,261)        (638,471)
-----------------------------------------------------------------------------------------------------------------
    NET CASH (USED) BY INVESTING ACTIVITIES                                         (19,917,681)      (9,050,145
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase (Decrease) in Deposits                                                   (219,271)      25,063,317
  Net Increase in Advances by Borrowers for Taxes and Insurance                         169,590          144,905
  Net (Decrease) in Repurchase Agreements                                              (319,435)        (793,523)
  Repayment of FHLB Advances                                                            (21,977)         (21,408)
  Proceeds from FHLB Advances                                                        10,000,000                -
-----------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                                         9,608,907       24,393,291
-----------------------------------------------------------------------------------------------------------------
      NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           (8,188,888)      18,167,736
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                        32,141,033       19,822,269
-----------------------------------------------------------------------------------------------------------------
      CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $  23,952,145       37,990,005
=================================================================================================================

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
(Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
  Net of Deferred Tax Liability                                                   $    (491,046)        (444,529)
Acquisition of Real Estate Property through Foreclosure of Related Loans          $     897,412        1,259,394
=================================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash Paid During the Period for:
    Income Taxes                                                                  $     448,881        1,180,682
    Interest                                                                      $   4,923,205        5,028,089
=================================================================================================================
</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 three months ended September 30, 2004 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, 2003.


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  September  30,  2004
     consolidated financial statements.


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

     Fixed assets at September 30, 2004, and December 31, 2003 are summarized as
follows:

                                                           2004          2003
                                                       -----------   -----------
     Land                                                1,580,000     1,580,000
     Buildings and Leasehold Improvements                4,923,697     4,030,608
     Furniture, Fixtures and Equipment                   3,279,796     2,699,624
                                                       -----------   -----------
                                                         9,783,493     8,310,232
     Less:  Accumulated Depreciation                     2,523,346     2,091,874
                                                       -----------   -----------
                                                         7,260,147     6,218,358
                                                       ===========   ===========







                                        8



<PAGE>

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

Loans  receivable  at September  30, 2004 and December 31, 2003,  consist of the
following:

                                                   2004             2003
                                              --------------   --------------
  First Mortgage Loans                           52,131,641       49,702,608
  Construction Loans                             24,412,567       21,817,058
  Consumer Loans                                 13,922,018       13,070,617
  Participation Loans, Net                                -          458,452
  Commercial Loans                               64,547,015       63,208,012
  Credit Line Advances                            1,102,470        1,185,167
  Lease Finance                                   1,420,617        1,550,376
                                             ---------------  ---------------

    Gross Loans and Leases Receivable           157,536,328      150,992,290
                                             ---------------  ---------------

  Less:
    Undisbursed Portion of Loans in Process     (    93,247)     (   101,875)
    Net Deferred Loan Origination Fees          (   260,680)     (   243,810)
    Accumulated General Loan Loss Allowance     ( 1,726,839)     ( 1,870,279)
                                             ---------------  ---------------
                                                ( 2,080,766)     ( 2,215,964)
                                             ---------------  ---------------

  Loans and Leases Receivable, Net              155,455,562      148,776,326
                                             ===============  ===============

An analysis of the allowance for loan and lease losses at September 30, 2004 and
December 31, 2003 is as follows:

                                                    2004             2003
                                              --------------   --------------
    Balance - Beginning of Period                 1,870,279        1,563,320
    Provision for Loan and Lease Losses              58,000          444,548
    Loans and Leases Charged-Off                 (  207,440)      (  137,609)
    Charged-Off Loan and Lease Recoveries             6,000               20
                                              --------------   --------------

    Balance - End of Period                       1,726,839        1,870,279
                                              ==============   ==============

     The gross  amount of  participation  loans  serviced  by State of  Franklin
     Savings  Bank was $0 at  September  30, 2004 and  $916,883 at December  31,
     2003.

     At September 30, 2004 the Company had non-accrual loans and leases totaling
     $2.9 million which  included  $18,000 in impaired  loans compared with $3.2
     million  and  $121,000,  respectively,  at  December  31,  2003.  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 $15,000 at  September  30, 2004 and $66,000 at December
     31,  2003.  No interest  income on impaired  loans was  recognized  for the
     periods ending September 30, 2004 and December 31, 2003. The Company had no
     loans  or  leases  90 days or more  past  due  and  still  accruing  and no
     restructured loans at September 30, 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 September 30, 2004:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        24,726    12.01%    >=20,588   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        23,315    11.32%    >=12,353    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       23,315     7.63%    >=15,269    5.0%

As of December 31, 2003:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        23,498    12.35%    >=19,021   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        21,923    11.53%    >=11,413    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       21,923     7.48%    >=14,649    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 September 30, 2004:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        34,519     16.77%   >=20,627    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        32,792     15.93%   >=12,376     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       32,792     10.69%   >=15,336     5.0%

As of December 31, 2003:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        33,361     17.52%   >=19,066    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        31,351     16.46%   >=11,440     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       31,351     10.63%   >=14,744     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
     September 30, 2004 was $678,738. 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 September 30, 2004, no balances were outstanding for advances
     on the line of credit.

     Shares owned by the ESOP at September 30, 2004 totaled 171,409. 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:

                                                      September 30, December 31,
                                                           2004          2003
                                                    -------------  -------------
      Number of Shares
        Released and Allocated since Inception           82,845         77,857
        Suspense                                         65,823         70,811

      Fair Value
        Released and Allocated since Inception        1,822,590      1,557,140
        Suspense                                      1,448,106      1,416,220

     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:

                                                      September 30, December 31,
                                                           2004          2003
                                                     -------------  ------------
      Compensation Expense                              333,000        408,370
      Contributions                                     333,000        408,370

     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, 2004        90,014    83,832     $12.47
                                                 During 2004             4,000     4,000     $20.00
     Options Granted - Management                January 1, 2004       238,211   183,706     $13.05
                                                 During 2004             7,256        --     $21.02
                                                                       -------   -------
     Options Outstanding - September 30, 2004                          339,481   271,538     $13.15
                                                                       =======   =======
</TABLE>

                                       11


<PAGE>


NOTE 8     DEPOSITS
-------   ----------

     Deposit balances are summarized as follows:

<TABLE>
<CAPTION>
                                          September 30, 2004              December 31, 2003
                                    -----------------------------  -----------------------------
                                      Rate     Amount     Percent    Rate     Amount     Percent
                                    ------- -----------  --------  ------- -----------  --------
     <S>                               <C>  <C>           <C>         <C>  <C>            <C>
     Passbook                          1.03  87,857,776     39.61     1.75  84,622,380     38.12
     Interest-Free Checking              --  15,077,622      6.80       --  12,114,590      5.46
     NOW                                .25  18,866,599      8.51     1.17  18,753,775      8.45
     Money Market Deposit              1.01  25,108,064     11.32     1.47  26,308,635     11.85
                                            -----------  --------          -----------  --------
                                            146,910,061     66.24          141,799,380     63.88
                                            -----------  --------          -----------  --------
     Fixed Term Certificate Accounts
      Balances $100,000 or greater     2.77  20,024,490      9.03     2.84  20,284,510      9.14
      Balances less than $100,000      2.60  54,838,664     24.73     2.66  59,908,596     26.98
                                            -----------  --------          -----------  --------
                                             74,863,154     33.76           80,193,106     36.12
                                            -----------  --------          -----------  --------
                                            221,773,215    100.00          221,992,486    100.00
                                            ===========  ========          ===========  ========
</TABLE>
The  contractual  maturity of  certificate  accounts at  September  30, 2004 and
December 31, 2003, is as follows:

       Period Ending September 30, 2004            Year Ending December 31, 2003
       --------------------------------            -----------------------------
          2004             11,383,246                2004            45,642,644
          2005             45,787,926                2005            21,464,822
          2006              8,112,576                2006             6,379,826
          2007              3,956,593                2007             2,937,998
          2008 and After    5,622,813                2008 and After   3,767,816
                           ----------                                ----------
                           74,863,154                                80,193,106
                           ==========                                ==========

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

The contractual maturity of FHLB advances at September 30, 2004 is as follows:

         2004       10,154          2009                34,093
         2005       30,675          2010             8,035,006
         2006       31,496          2011            19,035,943
         2007       32,339          2012             5,036,906
         2008    3,033,204          2013 and after  10,908,279


     Convertible  fixed rate advances were $45,000,000 at September 30, 2004 and
     35,000,000 at December 31, 2003. 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 $1,188,094 at September 30,
     2004 and $1,210,071 at December 31, 2003. The average rate on FHLB advances
     was 4.56% at September 30, 2004 and 4.85% at December 31, 2003.

     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 September 30, 2004 totaled
     $66.9  million  in   residential   mortgage  loans  and  $10.5  million  in
     securities.  At December 31, 2003 there were approximately $54.3 million in
     mortgage loans and no 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 September 30, 2004, by contractual maturity, are
     as follows.  Expected  maturities will differ from  contractual  maturities
     because  issuers may have the right to call or prepay  obligations  without
     call or prepayment penalties.


                                       12


<PAGE>


<TABLE>
<CAPTION>
                                                             Gross       Gross     Estimated
                                             Amortized    Unrealized   Unrealized    Market
                                                Cost         Gains       Losses      Value
                                             ----------     -------    ----------  -----------
     <S>                                     <C>          <C>          <C>         <C>
     Available-for-Sale:
          United States Government
            Agency Securities Maturing:
               Within one year                1,007,814       1,312           --     1,009,126

          Mortgage Backed Securities:
               After one year
                 but within five years          501,450      11,881           --       513,331
               After five years
                 but within ten years           584,691       6,942           --       591,633
               After ten years
                 but within fifteen years     1,136,505      10,171           --     1,146,676

              Municipal Securities Maturing:
               Within one year                  135,000       1,906           --       136,906
               After one year
                 but within five years        1,424,002      70,111           --     1,494,113
               After five years
                 but within ten years         6,890,564     426,005           --     7,316,569
               After ten years
                 but within fifteen years     8,263,482     606,435           --     8,869,917
               After fifteen years
                 but within twenty years      3,083,667     167,649           --     3,251,316
               After 20 years                 1,237,415      23,871       35,693     1,225,593

         Corporate Securities Maturing:
               Within one year                3,438,125      13,614           --     3,451,739
               After five years
                 but within ten years         3,000,000     111,270           --     3,111,270
               After twenty years             1,730,216     130,649           --     1,860,865

          Equity Securities
                Callable within one year     21,063,927          --    3,757,427    17,306,500
                Callable after one year
                  but within five years       4,414,150     100,000       26,920     4,487,230
                Callable after five years
                  but within ten years        1,000,000      25,000           --     1,025,000

          Other
               After 20 years                   318,155      24,994           --       343,149
                                             ----------   ---------    ---------   -----------
                  Total Available-for-Sale   59,229,163   1,731,810    3,820,040    57,140,933
                                             ==========   =========    =========   ===========

Held-to-Maturity:
          United States Government
            Agency Securities Maturing:
                After one year
                 but within five years        7,033,828      10,133      123,546     6,920,415

          Mortgage Backed Securities:
                After one year
                 but within five years        5,876,726       5,131        5,365     5,876,492
               After five years
                 but within ten years         6,783,182      30,614       31,073     6,782,723
               After ten years
                 but within fifteen years       730,568          --       26,567       704,001
               After twenty years            10,252,908          --       95,919    10,156,989

          Municipal Securities Maturing:
                After one year
                 but within five years        1,260,026       6,769           --     1,266,795
               After five years
                 but within ten years           429,981      12,141           --       442,122
               After ten years
                 but within fifteen years       327,636          --        1,765       325,871
               After twenty years             2,539,614      41,503       12,189     2,568,928

    </TABLE>

                                       13


<PAGE>


<TABLE>
<CAPTION>
                                                             Gross       Gross       Estimated
                                              Amortized   Unrealized   Unrealized     Market
                                                 Cost        Gains       Losses        Value
                                             ----------   ---------    ---------    -----------
<S>                                        <C>              <C>        <C>          <C>

          Corporate Securities Maturing:
               Within one year                1,129,768         189          571     1,129,386
               After one year
                 but within five years        8,488,205     119,620        6,523     8,601,302
               After five years
                 but within ten years         1,051,610      40,952        8,186     1,084,376
               After twenty years             5,244,779     326,283       38,165     5,532,897
                                             ----------   ---------    ---------    ----------
                  Total Held-to-Maturity     51,148,831     593,335      349,869    51,392,297
                                             ==========   =========    =========    ==========

</TABLE>
     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 September 30, 2004
     and December 31, 2003 totaled $2,000,000 and $2,030,774, respectively.

     Information  pertaining  to  securities  with  gross  unrealized  losses at
     September 30, 2004,  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
             Municipal Securities                   -              -        35,693       825,521
             Marketable Equity Securities     499,427      4,063,927     3,284,920    17,414,150
                                             --------      ---------     ---------    ----------
               Total Available-for-Sale       499,427      4,063,927     3,320,613    18,239,671

          Held-to-Maturity
             US Government Agencies            56,832      4,000,981        66,714     1,980,944
             Mortgage Backed Securities       158,451     17,647,253           473       231,805
             Municipal Securities              13,954        795,233             -             -
             Corporate Securities              52,874      3,906,912           571     1,028,582
                                             --------      ---------     ---------    ----------
               Total Held-to-Maturity         282,111     26,350,379        67,758     3,241,331
</TABLE>

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

     Earnings  per share for three and nine months  ended  September  30,  2004,
     compared with the same period in 2003, are as follows:

<TABLE>
<CAPTION>
                                               Three Months Ended          Nine Months Ended
                                                   September 30,              September 30,
                                                 2004        2003          2004        2003
                                              ---------   ---------     ---------   ---------
<S>                                          <C>          <C>           <C>         <C>
Net Income                                     615,195      669,096     1,743,429   2,114,794
Average Basic Shares Outstanding             1,398,918    1,391,454     1,397,302   1,387,058
Basic Earnings Per Share                           .44          .48          1.25        1.52
                                             =========    =========     =========   =========

Net Income                                     615,195      669,096     1,743,429   2,114,794
Average Basic Shares Outstanding             1,398,918    1,391,454     1,397,302   1,387,058
Dilutive Effect Due to Stock Options           136,543      116,710       129,927     101,789
                                             ---------    ---------     ---------   ---------
Average Shares Outstanding, as Adjusted      1,535,461    1,508,164     1,527,229   1,488,847
Diluted Earnings Per Share                         .40          .44          1.14        1.42
                                             =========    =========     =========   =========
</TABLE>


                                       14
<PAGE>
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 September 30, 2004, assets of State of Franklin Bancshares, Inc. totaled
     $303.3 million reflecting an increase of $11.2 million or 4% since December
     31, 2003.  The growth in assets has been funded  primarily by a $10 million
     increase in FHLB  advances  and a $1.4  million  increase  in  stockholder'
     equity.

     LOANS
     -----

     Loans  outstanding  totaled  $158.2  million at September 30, 2004 compared
     with $151.1  million at December  31,  2003.  Commercial  and  construction
     loans,  first mortgage  loans,  and consumer loans  increased $3.6 million,
     $2.4 million,  and $851,000,  respectively.  Credit line advances decreased
     $83,000.  The loan  portfolio  mix at  September  30, 2004  consists of 33%
     residential mortgages,  42% commercial,  15% real estate construction,  and
     10% consumer loans.

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

     Investment  securities  totaled  $108.3  million at September 30, 2004. The
     investment  portfolio  at quarter  end  consisted  of $8.0  million in debt
     securities issued by the U. S Government or Federal Agencies, $25.9 million
     in mortgage backed securities, $26.9 million in securities issued by state,
     county, or  municipalities,  $24.3 million in corporate  securities,  $22.8
     million in  preferred  stock  issued by Federal  Agencies,  and $343,000 in
     other equity securities.

     At September 30, 2004, securities categorized as available-for-sale totaled
     $57.1 million while the  held-to-maturity  securities totaled $51.1 million
     compared  to $63.4  million  in  available-for-sale  and $34.0  million  in
     held-to-maturity   at  December  31,  2003.  At  September  30,  2004,  the
     available-for-sale  portfolio had net unrealized losses of $2,089,000 while
     our held-to-maturity securities had $243,000 in net unrealized gains.

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

     At  September  30, 2004 the  Company had  nonaccrual  loans  totaling  $2.9
     million  compared  with $3.2 million at December 31, 2003.  The reserve for
     loan and lease losses was  $1,727,000  at September  30, 2004,  or 1.10% of
     loans and leases  outstanding,  net of  unearned  income and loans held for
     sale,  compared to  $1,870,000  or 1.24% at December 31,  2003.  Management
     believes the allowance for loan losses is adequate to provide for potential
     loan losses.

     DEPOSITS
     --------

     Total deposits at September 30, 2004 of $221.8 million,  reflected a slight
     decrease of $218,000 from $222.0 million at December 31, 2003. Non-interest
     bearing  demand  deposits  totaled  $15.1 million at September 30, 2004, an
     increase of $3.0 million from December 31, 2003.  Interest bearing deposits
     decreased $3.2 million to $206.7 million at September 30, 2004.

     CAPITAL
     -------

     Tier 1  capital  for the  Savings  Bank at  September  30,  2004 was  $23.3
     million.  At September 30, 2004,  all capital  ratios were in excess of the
     regulatory minimums, with the Savings Bank's Tier 1, total risk-based,  and
     leverage ratios of 11.32%, 12.01% and 7.63%, respectively.

     Tier 1 capital for the Company at  September  30, 2004,  was $32.7  million
     with Tier 1, total risk-based,  and leverage ratios of 15.93%,  16.77%, and
     10.69%, respectively.


<PAGE>

     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.




























                                       15
<PAGE>

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

     The  Company  had net  income  of  $615,000  for the  three  months  ending
     September  30, 2004,  compared with $669,000 for the same period last year,
     resulting  in a decrease of 8%.  Return on average  assets was .80% and the
     return on average equity was 9.88% for the three months ended September 30,
     2004, compared with .91% and 11.26%,  respectively,  for the same period in
     2003.  For the nine  months  ending  September  30,  2004,  net  income was
     $1,743,000  compared with  $2,115,000 for the same period ending  September
     30, 2003.  Return on average assets and average equity were .76% and 9.43%,
     respectively,  compared  with 1.02% and  12.25%  for the nine month  period
     ended September 30, 2003. For the nine months ended September 30, 2004, net
     income per diluted share was $1.14  compared to earnings per share of $1.42
     for the same period in 2003.

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

     Interest income increased and interest expense decreased from 2003 to 2004.
     Net interest  income of $10,786,000 for the nine months ended September 30,
     2004 reflects an increase of $153,000 or 1% over the same period last year.
     For the nine months  ending  September  30, 2004,  average  earning  assets
     increased $22.9 million or 9% while average  interest  bearing  liabilities
     increased  $22.1 million,  also 9%,  compared with the same period in 2003.
     The taxable  equivalent yield on earning assets declined 35 basis points to
     5.21% for the first nine  months of 2004  compared  with the same period in
     2003  while the cost on  interest  bearing  liabilities  declined  27 basis
     points to 2.46%.  Consequently,  the taxable equivalent net interest margin
     based on average  earning  assets  decreased  to 2.96% for the nine  months
     ending September 30, 2004 compared with 3.07% for the same period in 2003.

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

     During the nine months ended September 30, 2004, the provision for possible
     loan losses was $58,000  compared  with  $392,000  for the same period last
     year.  There were $201,000 in loan or lease  charge-offs  net of recoveries
     for the nine months ended September 30, 2004,  compared to $138,000 in loan
     or lease  charge-offs  during the same period in 2003.  The  allowance  for
     possible  loan losses  represented  1.10% of total  loans,  net of mortgage
     loans held-for-sale,  at September 30, 2004, compared to 1.24% at September
     30, 2003. Management considers the allowance for loan losses to be adequate
     to cover losses inherent in the loan portfolio.

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

     For the nine months ended September 30, 2004, the provision for federal and
     state  income taxes was  $549,000,  a decrease of $193,000  from 2003.  The
     decrease is due to a decline in taxable income  compared to the same period
     in 2003.

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

     The  Company's  noninterest  income was  $1,085,000  during the nine months
     ended September 30, 2004, a decrease of $425,000 or 28% from the comparable
     2003 period. During 2004, other fees and service charges, real estate sales
     commissions,  and net rental income increased $21,000, $95,000, and $2,000,
     respectively. Insurance commission income declined $28,000 and net gains on
     loans sold  declined  $514,000.  The decline in net gains on loans sold was
     due  primarily  to a  reduction  in the  number  of  mortgage  loans  being
     refinanced.

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

     Noninterest  expense  totaled  $4,619,000  for the nine month period ending
     September 30, 2004,  an increase of $715,000,  or 18%, over the same period
     in 2003.  The  increase was the result of  increases  in  compensation  and
     benefits, occupancy expense, furniture and equipment expense,  advertising,
     data  processing,  and  other  operating  expenses  of  $138,000,  $45,000,
     $117,000, $96,000, $63,000, and $255,000, respectively.

                                       16
<PAGE>


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 September 30,
     2004.  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.


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
September 30, 2004


                                      17


<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)





   November 9, 2004                           /s/ Randal R. Greene
---------------------------                   ----------------------------------
         (Date)                               Randal R. Greene, President





   November 9, 2004                           /s/ Charles E. Allen, Jr.
---------------------------                   ----------------------------------
         (Date)                               Charles E. Allen, Jr.,
                                              Chairman of the Board
                                              and Chief Executive Officer
                                              (Principal Executive, Financial
                                              and Accounting Officer)



































                                       18