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:   MARCH 31, 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 MAY 10, 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
                     MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004 (AUDITED)

                  CONSOLIDATED STATEMENTS OF INCOME                                            4
                     THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) AND 2004 (UNAUDITED)

                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                   5
                     THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
                     AND YEAR ENDED DECEMBER 31, 2004 (AUDITED)

                  CONSOLIDATED STATEMENTS OF CASH FLOWS                                        6
                     THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) AND 2004 (UNAUDITED)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                       7


         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS                                                10

         ITEM 3.  CONTROLS AND PROCEDURES                                                     16



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


                                                                  MARCH 31,         DECEMBER 31,
                             ASSETS                           2005 - UNAUDITED     2004 - AUDITED
-------------------------------------------------------------------------------------------------
<S>                                                              <C>                  <C>
Cash and Due from Banks                                          $   5,423,877          5,564,907
Federal Funds Sold                                                     150,000          7,130,000
Short-Term Interest Bearing Deposits                                 6,463,994          2,279,711
-------------------------------------------------------------------------------------------------
   Total Cash and Cash Equivalents                                  12,037,871         14,974,618
-------------------------------------------------------------------------------------------------
Investments - HTM
   (Estimated Market 2005 - $47,987,392 and 2004 - $49,864,335)     48,418,121         49,702,867
Investments - AFS                                                   52,519,998         53,650,416
Loans Held for Sale                                                          -            374,700
Loans and Leases Receivable                                        172,186,889        164,458,145
   Less: Allowance for Loan and Lease Losses                      (  1,662,695)       ( 1,601,332)
-------------------------------------------------------------------------------------------------
   Loans and Leases Receivable, Net                                170,524,194        162,856,813
-------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net                                     1,564,443          1,490,634
Land, Buildings & Equip at Cost Less Accum Depr
   of $2,779,578 in 2005 and $2,643,828 in 2004                      7,832,812          7,468,710
Prepaid Expense and Accounts Receivable                                145,916            175,816
Deferred Tax Assets                                                  1,637,514          1,727,642
FHLB Stock                                                           2,480,500          2,453,300
Investment in Service Bureau at Cost                                   815,009            815,009
Other Real Estate Owned                                                884,656            891,413
Other Assets                                                            98,958            124,241
-------------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                   $ 298,959,992        296,706,179
=================================================================================================
             LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits                                           $  16,087,550         15,371,046
Interest-Bearing Deposits                                          199,629,711        198,784,547
Advances to Borrowers for Taxes and Insurance                          200,445            110,328
Accrued Interest on Deposits                                           211,732            136,476
Accrued State and Federal Taxes                                    (     9,291)       (   149,118)
Other Accounts Payable and Accrued Expenses                            595,568            784,704
Repurchase Agreements                                                  507,218          1,024,608
FHLB Long-Term Advances                                             46,173,200         46,180,671
Deferred Credits on REO                                                189,384            189,384
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                         $ 263,585,517        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                             ( 1,859,999)       ( 2,005,925)
Retained Earnings                                                   13,759,842         13,204,732
  Less: Employee Stock Ownership                                   (   605,204)       (   642,247)
-------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                $  27,374,475         26,273,533
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 298,959,992        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 MARCH 31,
                                                      ----------------------------------
INTEREST INCOME:                                      2005 - UNAUDITED  2004 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                     <C>                    <C>
Interest and Fees on Loans                              $    2,719,054         2,443,632
Other Interest Income                                        1,157,193         1,143,814
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 3,876,247         3,587,446
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                           928,320         1,059,974
Interest on Repurchase Agreements                                2,082             2,588
Interest on Short-Term Debt                                        403               (20)
Interest on Long-Term Debt                                     519,084           463,128
Interest on Subordinated Debentures                            135,731           108,287
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                1,585,620         1,633,957
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           2,290,627         1,953,489
PROVISION FOR LOAN LOSSES                                      (60,000)          (10,000)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            2,230,627         1,943,489
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 149,033           118,910
Net Gain on Loans Sold                                          54,905            72,349
Realized Gain on Securities                                          -                 -
Real Estate Sales Commission Income                            100,670            55,281
Insurance Commission Income                                      9,527            11,324
Rental Income, Net                                              14,909            21,014
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                      329,044           278,878
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                              869,491           717,953
Occupancy Expenses                                             122,062            98,424
Furniture and Equipment Expense                                118,879           123,748
Advertising                                                    113,260            63,424
Data Processing Expense                                        165,418           162,115
Other Operating Expenses                                       439,987           327,506
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  1,829,097         1,493,170
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                                730,574           729,197
PROVISION FOR INCOME TAXES                                    (175,463)         (176,766)
----------------------------------------------------------------------------------------
       NET INCOME                                       $      555,111           552,431
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                 $         0.39              0.40
  DILUTED                                                         0.35              0.37
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,424,947         1,395,814
  DILUTED                                                    1,568,311         1,512,433
========================================================================================
</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 CHANGES IN STOCKHOLDERS' EQUITY
 FOR THREE MONTHS ENDED MARCH 31, 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)        --           --  (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                         --           --          --          --      37,043          37,043

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Gains
        Arising During the Period
         (Net of $90,422 Income Tax)          --           --     145,691          --          --         145,691
      Less: Reclassification Adjustment
         (Net of $146 Income Tax)             --           --         235          --          --             235
                                                                                                     ------------
                                                                                                          145,926

  Net Income                                  --           --          --     555,111          --         555,111
                                                                                                     ------------
        Total Comprehensive Income            --           --          --          --          --         701,037
                                    ------------   ----------   ---------  ----------   ---------    ------------
Balance at March 31, 2005              1,481,462   14,598,374  (1,859,999) 13,759,842   ( 605,204)     27,374,475
                                    ============   ==========   =========  ==========   ==========   ============
</TABLE>


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



                                        5
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                  THREE MONTHS ENDED MARCH 31,
                                                                               ----------------------------------
                                                                               2005 - UNAUDITED  2004 - UNAUDITED
                                                                               ----------------  ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>                <C>
  Net Income                                                                      $     555,111          552,431
  Items Not Affecting Cash:
    Depreciation                                                                        135,750          144,488
    (Increase) Decrease in Accrued Interest                                             (73,809)        (116,331)
    Deferred Income Taxes (Benefit)                                                      13,134           24,716
    Provision for Loan and Lease Losses                                                  60,000           10,000
    (Increase) Decrease in Prepaid Expenses and Accounts Receivable                      29,900          (67,734)
    Increase (Decrease) in Interest Payable                                              75,256           (5,219)
    Increase in State and Federal Taxes Payable                                         139,827          102,644
    Increase (Decrease) in Other Accounts Payable and Accrued Expenses                 (189,136)          44,475
    Increase Decrease) in Deferred Loan Fees, Net                                         9,699           (5,898)
    Realized (Gain) on Securities                                                             -                -
    Discount Accretion                                                                  (68,723)         (48,389)
    Premium Amortization                                                                163,680          141,098
    Increase in Deferred Gain on Sale of REO                                                  -           25,783
    Earned ESOP Shares                                                                   37,043           34,890
    FHLB Stock Dividends                                                                (27,200)         (23,400)
    Net (Increase) Decrease in Loans Held for Sale                                      374,700         (982,062)
-----------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                                       1,235,232         (168,508)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Held-to-Maturity Investments                                                    -      (17,103,992)
  Purchase of Available-for-Sale Investments                                                  -                -
  Proceeds from Maturities of Held-to-Maturity Investments                              100,000        4,405,000
  Proceeds from Maturities of Available-for-Sale Investments                          1,135,000          130,000
  Principal Payments on Mortgage-backed Securities - HTM                              1,081,145          959,790
  Principal Payments on Mortgage-backed Securities - AFS                                252,534          613,547
  (Increase) in Loans Receivable, Net                                                (7,730,593)        (478,065)
  Purchases of Premises and Equipment                                                  (499,852)        (682,947)
-----------------------------------------------------------------------------------------------------------------
    NET CASH (USED) BY INVESTING ACTIVITIES                                          (5,661,766)     (12,156,667)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase in Deposits                                                            1,561,668        7,626,128
  Net Increase in Advances by Borrowers for Taxes and Insurance                          90,117           76,290
  Net Increase in Repurchase Agreements                                                (517,390)         559,164
  Issuance of Common Stock                                                              362,863                -
  Repayment of FHLB Advances                                                             (7,471)          (7,359)
  Proceeds from FHLB Advances                                                                 -       10,000,000
-----------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                                         1,489,787       18,254,223
-----------------------------------------------------------------------------------------------------------------
      NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           (2,936,747)       5,929,048
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                        14,974,618       32,141,033
-----------------------------------------------------------------------------------------------------------------
      CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $  12,037,871       38,070,081
=================================================================================================================

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase in Unrealized Gain on Securities Available-For-Sale,
  Net of Deferred Tax Liability                                                   $     145,926          355,736
Acquisition of Real Estate Property through Foreclosure of Related Loans          $      32,857           31,848
=================================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash Paid During the Period for:
    Income Taxes                                                                  $      58,180           99,525
    Interest                                                                      $   1,510,364        1,639,176
=================================================================================================================
</TABLE>

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



                                        6
<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 March 31, 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 March 31, 2005 consolidated
     financial statements.


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

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

                                                          2005          2004
                                                      -----------   -----------
     Land                                               1,580,000     1,580,000
     Buildings and Leasehold Improvements               5,349,356     5,082,535
     Furniture, Fixtures and Equipment                  3,683,034     3,450,003
                                                      -----------   -----------
                                                       10,612,390    10,112,538
     Less:  Accumulated Depreciation                    2,779,578     2,643,828
                                                      -----------   -----------
                                                        7,832,812     7,468,710
                                                      ===========   ===========











                                        7

<PAGE>
NOTE  5     LOANS  RECEIVABLE
-------    ------------------

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


                                                   2005             2004
                                              --------------   --------------
  First Mortgage Loans                           52,168,456       51,639,109
  Construction Loans                             31,514,176       27,146,299
  Consumer Loans                                 14,755,099       14,407,548
  Commercial Loans                               71,155,461       69,267,247
  Credit Line Advances                            1,514,337          870,529
  Lease Finance                                   1,343,529        1,381,883
                                             ---------------  ---------------
    Gross Loans and Leases Receivable           172,451,058      164,712,615
                                             ---------------  ---------------
  Less:
    Net Deferred Loan Origination Fees          (   264,169)     (   254,470)
    Accumulated General Loan Loss Allowance     ( 1,662,695)     ( 1,601,332)
                                             ---------------  ---------------
                                                ( 1,926,864)     ( 1,855,802)
                                             ---------------  ---------------

  Loans and Leases Receivable, Net              170,524,194      162,856,813
                                             ===============  ===============

An analysis  of the  allowance  for loan and lease  losses at March 31, 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              60,000       (   62,000)
    Loans and Leases Charged-Off                          -       (  212,947)
    Charged-Off Loan and Lease Recoveries             1,363            6,000
                                              --------------   --------------
    Balance - End of Period                       1,662,695        1,601,332
                                              ==============   ==============

At March  31,  2005 the  Company  had  non-accrual  loans  and  leases  totaling
$1,209,000 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 March 31,
2005 and December 31, 2004. No interest  income on impaired loans was recognized
for the periods  ending March 31, 2005 and December 31, 2004. The Company had no
loans or leases 90 days or more past due and still accruing and no  restructured
loans at March 31, 2005.



                                        8



<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 March 31, 2005:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        26,269    12.20%    >=21,540   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        24,803    11.51%    >=12,924    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       24,803     8.41%    >=14,746    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 March 31, 2005:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        36,374     16.84%   >=21,601    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        34,711     16.07%   >=12,961     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       34,711     11.74%   >=14,788     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%


                                        9

<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 March
     31,  2005 was  $605,204.  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 March 31, 2005, no balances were outstanding for advances on
     the line of credit.

     Shares owned by the ESOP at March 31, 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:

                                                         March 31,  December 31,
                                                            2005           2004
                                                    -------------  -------------
      Number of Shares
        Released and Allocated since Inception            46,073         46,073
        Suspense                                          44,641         44,641

      Fair Value
        Released and Allocated since Inception         1,163,343      1,013,606
        Suspense                                       1,127,185        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:

                                                        March 31,   December 31,
                                                           2005           2004
                                                    -------------  -------------
      Compensation Expense                                111,000        444,000
      Contributions                                       111,000        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.

<TABLE>
<CAPTION>
     STOCK OPTION PLANS
                                                                                           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     7,000     $25.25
     Options Granted - Management                January 1, 2005       249,423   193,011     $13.43
                                                 During 2005             9,279     5,384     $25.25
                                                                       -------   -------
     Options Outstanding - March 31, 2005                              359,716   293,718     $13.80
                                                                       =======   =======
</TABLE>

                                       10

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

     Deposit balances are summarized as follows:

<TABLE>
<CAPTION>
                                            March 31, 2005              December 31, 2004
                                    -----------------------------  -----------------------------
                                       Rate     Amount    Percent    Rate      Amount    Percent
                                    ------- -----------  --------  ------- -----------  --------
     <S>                               <C>  <C>            <C>        <C>  <C>            <C>
     Passbook                          1.26  56,049,919     25.98     1.13  72,157,046     33.69
     Interest-Free Checking              --  16,087,550      7.46       --  15,371,046      7.18
     NOW                                .25  17,536,005      8.13      .25  20,439,053      9.54
     Money Market Deposit              1.17  20,476,991      9.49     1.07  22,156,509     10.35
                                            -----------  --------          -----------  --------
                                            110,150,465     51.06          130,123,654     60.76
                                            -----------  --------          -----------  --------
     Fixed Term Certificate Accounts
      Balances $100,000 or greater     3.17  30,715,176     14.24     2.84  22,745,289     10.62
      Balances less than $100,000      2.95  74,851,620     34.70     2.66  61,286,650     28.62
                                            -----------  --------          -----------  --------
                                            105,566,796     48.94           84,031,939     39.24
                                            -----------  --------          -----------  --------
                                            215,717,261    100.00          214,155,593    100.00
                                            ===========  ========          ===========  ========
</TABLE>

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

         Period Ending March 31, 2005              Year Ending December 31, 2004
       --------------------------------            -----------------------------
          2005             42,862,714                2005            52,996,714
          2006             38,930,372                2006            20,586,376
          2007             17,981,269                2007             4,800,025
          2008              4,263,265                2008             4,138,797
          2009 and After    1,529,176                2009 and After   1,510,027
                          -----------                                ----------
                          105,566,796                                84,031,939
                          ===========                                ==========

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

The contractual maturity of FHLB advances at March 31, 2005 is as follows:

         2005       22,710          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 March 31,  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  $1,173,200 at March 31, 2005 and  $1,180,671 at December 31, 2004.  The
average rate on FHLB  advances was 4.56% at both March 31, 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 March  31,  2005  totaled  $66.9  million  in
residential mortgage loans and $8.7 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 March 31, 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.

                                       11


<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          723,404       3,404          358       726,450
               After five years
                 but within ten years           998,386         729          194       998,921

              Municipal Securities Maturing:
               Within one year                  140,000       2,730           --       142,730
               After one year
                 but within five years        1,454,128      45,497           --     1,499,625
               After five years
                 but within ten years         8,822,194     374,422           --     9,196,616
               After ten years
                 but within fifteen years     6,208,255     352,038           --     6,560,293
               After fifteen years
                 but within twenty years      3,093,801     163,030           --     3,256,831
               After 20 years                 1,243,269      31,347       16,089     1,258,527

         Corporate Securities Maturing:
               Within one year                1,318,699       3,462           --     1,322,161
               After one year
                 but within five years        3,000,000          --      132,402     2,867,598
               After twenty years             1,730,325     117,300           --     1,847,625

          Equity Securities: (Preferred
            Stock in US Government Agencies)
                Callable within one year     21,069,339          --    3,820,139    17,249,200
                Callable after one year
                  but within five years       4,414,150          --      165,453     4,248,697
                Callable after five years
                  but within ten years        1,000,000          --       11,800       988,200

          Other Equity Stock:
               After 20 years                   318,155      38,369           --       356,524
                                             ----------   ---------    ---------   -----------
                  Total Available-for-Sale   55,534,105   1,132,328    4,146,435    52,519,998
                                             ==========   =========    =========   ===========
Held-to-Maturity:
          United States Government
            Agency Securities Maturing:
                After one year
                 but within five years        7,024,508          --      234,926     6,789,582

          Mortgage Backed Securities:
                After one year
                 but within five years        5,136,380          --       39,341     5,097,039
               After five years
                 but within ten years        11,740,619          --      152,683    11,587,936
               After fifteen years
                 but within twenty years        474,224       2,671           --       476,895
               After twenty years             3,835,047       6,295       65,780     3,775,562

          Municipal Securities Maturing:
                After one year
                 but within five years        1,231,106      11,716          361     1,242,461
               After five years
                 but within ten years           429,982       2,602           --       432,584
               After ten years
                 but within fifteen years       335,828          --        4,112       331,716
               After twenty years             2,587,741       3,226        8,833     2,582,134
</TABLE>

                                       12

<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                2,142,577      11,877          677     2,153,777
               After one year
                 but within five years        7,276,348       2,720       88,217     7,190,851
               After five years
                 but within ten years           995,289          87        4,656       990,720
               After twenty years             5,208,472     132,171        4,508     5,336,135
                                             ----------     -------    ---------   -----------
                  Total Held-to-Maturity     48,418,121     173,365      604,094    47,987,392
                                             ==========     =======    =========   ===========
</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 March 31, 2005 and
     December 31, 2004 totaled $2,043,124 and $2,005,365, respectively.

     Information  pertaining to securities with gross unrealized losses at March
     31,  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           552        999,511             -             -
             Municipal Securities                   -              -        16,089       804,176
             Corporate Securities             132,402      2,867,598             -             -
             Marketable Equity Securities     146,404      3,794,400     3,850,988    16,691,697
                                             --------      ---------     ---------    ----------
               Total Available-for-Sale       279,358      7,661,509     3,867,077    17,495,873

          Held-to-Maturity
             US Government Agencies            97,818      3,945,306       137,108     2,844,276
             Mortgage Backed Securities       111,365      7,616,764       151,094    12,163,917
             Municipal Securities               4,472        486,446         8,834       471,254
             Corporate Securities              93,403      9,570,911             -             -
                                             --------      ---------     ---------    ----------
               Total Held-to-Maturity         307,058     21,619,427       297,036    15,479,447
</TABLE>
NOTE 11     EARNINGS PER SHARE
-------     ------------------

     Earnings per share for three months ended March 31, 2005, compared with the
     same period in 2004, are as follows:

                                                            Three Months Ended
                                                                  March 31,
                                                              2005        2004
                                                           ---------   ---------
          Net Income                                         555,111     552,431

          Average Basic Shares Outstanding                 1,424,947   1,395,814

          Basic Earnings Per Share                               .39         .40
                                                           =========   =========

          Net Income                                         555,111     552,431

          Average Basic Shares Outstanding                 1,424,947   1,395,814
          Dilutive Effect Due to Stock Options               143,364     116,619
                                                           ---------   ---------
          Average Shares Outstanding, as Adjusted          1,568,311   1,512,433

          Diluted Earnings Per Share                             .35        0.37
                                                           =========   =========

                                       13
<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 March 31, 2005,  assets of State of Franklin  Bancshares,  Inc.  totaled
     $299 million  reflecting an increase of $2 million since December 31, 2004.
     The growth in assets has been funded  primarily by a $2 million increase in
     deposits.

     LOANS
     -----

     Loans  outstanding  totaled  $172.2 million at March 31, 2005 compared with
     $164.8  million at  December  31,  2004.  First  mortgage  loans  increased
     $117,000,   consumer   loans   increased   $991,000,   and  commercial  and
     construction loans increased $6.3 million.  The loan portfolio mix at March
     31, 2005 consists of 32% residential  mortgages,  43% commercial,  16% real
     estate construction, and 9% consumer loans.

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

     Investment  securities  totaled  $100.9  million  at March  31,  2005.  The
     investment  portfolio  at quarter  end  consisted  of $7.0  million in debt
     securities issued by the U. S Government or Federal Agencies, $22.9 million
     in mortgage backed securities, $26.5 million in securities issued by state,
     county, or  municipalities,  $21.7 million in corporate  securities,  $22.5
     million in  preferred  stock  issued by Federal  Agencies,  and $357,000 in
     other equity securities.

     At March 31, 2005,  securities  categorized as  available-for-sale  totaled
     $52.5 million while the  held-to-maturity  securities totaled $48.4 million
     compared  to $53.7  million  in  available-for-sale  and $49.7  million  in
     held-to-maturity   at  December   31,  2004.   At  March  31,   2005,   the
     available-for-sale  portfolio  had net  unrealized  losses of $3.0  million
     while  our  held-to-maturity  securities  had  $431,000  in net  unrealized
     losses.

                                       14
<PAGE>
     NON-PERFORMING ASSETS
     ---------------------

     At March 31, 2005 the Company had  nonaccrual  loans  totaling $1.2 million
     compared  with $1.2 million at December 31, 2004.  The reserve for loan and
     lease losses was  $1,662,695 at March 31, 2005, or .97% 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.

     DEPOSITS
     --------

     Total deposits at March 31, 2005 of $215.7  million,  reflected an increase
     of $1.6 million or a 1% increase from $214.2  million at December 31, 2004.
     Non-interest  bearing  demand  deposits  totaled $16.1 million at March 31,
     2005,  an increase of $717,000  from  December 31, 2004.  Interest  bearing
     deposits increased $845,000 million to $199.6 million at March 31, 2005.

     CAPITAL
     -------

     Tier 1 capital for the Savings Bank at March 31, 2005 was $22.8 million. At
     March 31,  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 11.51%, 12.20% and 8.41%, respectively.

     Tier 1 capital for the Company at March 31,  2005,  was $34.7  million with
     Tier 1,  total  risk-based,  and  leverage  ratios of 16.07%,  16.84%,  and
     11.74%, 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 $555,000  for the three  months  ending March
     31, 2005, compared with $552,000 for the same period last year, an increase
     of $3,000.  Return on average assets and average equity was .76% and 8.59%,
     respectively, compared with .75% and 8.90% for the three month period ended
     March 31, 2004.  For the three months ended March 31, 2005,  net income per
     diluted  share was $.35 compared to earnings per share of $.37 for the same
     period in 2004.

     Noninterest income increased $50,000, or 18%, during the three months ended
     March  31,  2005,  compared  to the same  period  last  year as a result of
     increases  in  other  fees  and  service  charges  and  real  estate  sales
     commissions.  Partially offsetting the increases were declines in net gains
     on loans sold, insurance commissions, and rental income.

     Noninterest  expense was  $1,829,000  for the three months ending March 31,
     2005, an increase of $336,000, or 23% over the 2004 period,  resulting from
     increases  in  compensation  and  related  benefits,   occupancy   expense,
     advertising, data processing, and other operating expenses.

                                       15
<PAGE>


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

     Interest  income  increased  while interest  expense  declined from 2004 to
     2005. Net interest  income of $2.3 million for the three months ended March
     31,  2005  reflects an increase of $289,000 or 8% over the same period last
     year.  For the three months ending March 31, 2005,  average  earning assets
     declined  $3.2 million or 1% while  average  interest  bearing  liabilities
     declined $5.9 million,  or 2%,  compared with the same period in 2004.  The
     taxable  equivalent  yield on earning  assets  increased 53 basis points to
     5.87% for the first three months of 2005  compared  with the same period in
     2004  while the cost on  interest  bearing  liabilities  declined  12 basis
     points to 2.89%.  Consequently,  the taxable equivalent net interest margin
     based on average  earning  assets  increased  to 3.58% for the three months
     ending March 31, 2005 compared with 2.89% for the same period in 2004.

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

     During the three months ended March 31, 2005,  the  provision  for possible
     loan  losses was  $60,000  compared  with  $10,000 for the same period last
     year. There was $1,000 in loan and lease recoveries with no charge-offs for
     the three months  ended March 31, 2005,  compared to $9,000 in net loan and
     lease  charge-offs  during  the same  period  in 2004.  The  allowance  for
     possible loan and lease losses  represented .97% of total loans and leases,
     net of mortgage loans  held-for-sale,  at March 31, 2005, compared to 1.24%
     at March 31, 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 three months ended March 31, 2004,  the  provision  for federal and
     state income taxes were $175,000,  compared to $177,000 for the first three
     months ended March 31, 2004.

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

     The Company's noninterest income was $329,000 during the three months ended
     March 31,  2005,  an  increase of $50,000 or 18% from the  comparable  2004
     period.  During 2005, other fees and service charges  increased $30,000 and
     real estate sales commissions  increased  $45,000.  Net gain on loans sold,
     insurance  commission  income,  and net  rental  income  declined  $17,000,
     $2,000, and $6,000, respectively.

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

     Noninterest  expense  totaled  $1,829,000 for the three month period ending
     March 31, 2005,  an increase of $336,000,  or 23%,  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 $152,000,  $24,000,  $50,000,  $3,000, and $112,000,
     respectively.  During  the  first  three  months  of  2005,  furniture  and
     equipment expense declined $5,000.


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 March 31,
     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.

                                       16

<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
March 31, 2005




                                       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)





      May 12, 2005                            /s/Randal R. Greene
---------------------------                   ----------------------------------
         (Date)                                  Randal R. Greene, President





      May 12, 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)










                                       18

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