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

                                   FORM 10-QSB

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT
     OF 1934

               FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2002
                                               ------------------


[ ]  TRANSITION   REPORT   PURSUANT  TO  SECTION  13 OR 15(d) 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                                       62-1607709
---------------------------------               --------------------------------
    (STATE OF INCORPORATION)                           (I.R.S.  EMPLOYER
                                                       IDENTIFICATION NO.)


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


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


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


CHECK WHETHER THE ISSUER:  (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15 (d) OF THE  EXCHANGE ACT DURING THE PAST 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 12, 2002)


           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, 2002 (UNAUDITED) AND DECEMBER 31, 2001 (AUDITED)

                  CONSOLIDATED STATEMENTS OF INCOME                                        4 - 5
                     THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
                      NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)

                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                   6
                     NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
                     AND YEAR ENDED DECEMBER 31, 2001 (AUDITED)

                  CONSOLIDATED STATEMENTS OF CASH FLOWS                                        7
                     NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED) AND 2001 (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                                                     18



PART II.  OTHER INFORMATION

        ITEM 1.   LEGAL PROCEEDINGS                                                           18

        ITEM 2.   CHANGES IN SECURITIES                                                       18

        ITEM 3.   DEFAULT UPON SENIOR SECURITIES                                              18

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

        ITEM 5.   OTHER INFORMATION                                                           18

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

        SIGNATURES                                                                            19

        CERTIFICATIONS                                                                   20 - 21


</TABLE>












                                        2















<PAGE>

PART I  -  FINANCIAL INFORMATION

         ITEM 1.   FINANCIAL STATEMENTS

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

                        CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                                                                 SEPTEMBER 30,       DECEMBER 31,
                             ASSETS                           2002 - UNAUDITED     2001 - AUDITED
-------------------------------------------------------------------------------------------------
<S>                                                              <C>                  <C>
Cash and Due from Banks                                          $   3,997,778          5,252,689
Federal Funds Sold                                                  13,265,000         28,590,000
Short-Term Interest Bearing Deposits                                   626,039             57,649
Investments - HTM
   (Estimated Market 2002 - $22,766,369 and 2001 - $9,636,374)      19,808,111          9,676,885
Investments - AFS                                                   59,077,027         63,780,481
Loans Held for Sale                                                  3,471,650          2,548,370
Loans and Leases Receivable                                        157,999,051        139,090,332
   Less: Allowance for Loan and Lease Losses                        (1,407,316)        (1,473,855)
-------------------------------------------------------------------------------------------------
   Loans and Leases Receivable, Net                                156,591,735        137,616,477
-------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net                                     1,486,643          1,364,280
Land, Buildings & Equip at Cost Less Accum Depr
   of $1,625,544 in 2002 and $1,260,895 in 2001                      5,508,307          5,319,180
Prepaid Expense and Accounts Receivable                                 19,106            119,647
Deferred Tax Assets                                                     19,618            709,103
FHLB Stock                                                           2,237,800          2,161,700
Other Real Estate Owned                                              1,516,904            449,988
Other Assets                                                           200,000            239,000
-------------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                   $ 267,825,718        257,885,449
=================================================================================================
             LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits                                           $  10,658,270         18,216,284
Interest-Bearing Deposits                                          188,436,069        181,920,790
Advances by Borrowers for Taxes and Insurance                          257,509             99,414
Accrued Interest on Deposits                                           187,425            179,897
Accounts Payable and Accrued Expenses                                  759,754            420,784
Repurchase Agreements                                                  708,936                  -
FHLB Long-Term Advances                                             36,168,711         30,240,995
Deferred Credits on REO                                                144,338             21,448
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                         $ 237,321,012        231,099,612
-------------------------------------------------------------------------------------------------

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                                 886,762        (   368,029)
Retained Earnings                                                    6,970,796          4,526,987
  Less: Employee Stock Ownership                                    (1,069,825)       ( 1,090,094)
-------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                $  22,504,706         18,785,837
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 267,825,718        257,885,449
=================================================================================================
</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 SEPTEMBER ENDED 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2002 - UNAUDITED  2001 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                    <C>                     <C>
Interest and Fees on Loans                             $     2,905,053         2,697,446
Other Interest Income                                        1,236,033         1,078,658
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 4,141,086         3,776,104
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         1,335,117         1,976,396
Interest on Repurchase Agreements                                3,146                 -
Interest on Short-Term Debt                                         25                 4
Interest on Long-Term Debt                                     441,434           318,933
Interest on Subordinated Debentures                            123,851                 -
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                1,903,573         2,295,333
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           2,237,513         1,480,771
PROVISION FOR LOAN LOSSES                                     (127,500)         ( 68,494)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            2,110,013         1,412,277
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 114,537           105,523
Net Gain on Loans Sold                                          87,469            49,526
Realized Gain on Securities                                    255,758                 -
Real Estate Sales Commission Income                             55,454                 -
Insurance Commission Income                                     16,703            10,249
Rental Income, Net                                              28,430            18,683
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                      558,351           183,981
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                              653,955           460,532
Occupancy Expenses                                             108,165            63,748
Furniture and Equipment Expense                                112,300            91,592
Advertising                                                     53,186            23,288
Data Processing Expense                                        133,379           104,839
Other                                                          373,824           205,873
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  1,434,809           949,872
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                              1,233,555           646,386
PROVISION FOR INCOME TAXES                                    (257,611)          (97,006)
----------------------------------------------------------------------------------------
       NET INCOME                                      $       975,944           549,380
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                $          0.71              0.40
  DILUTED                                                         0.66              0.38
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,381,397         1,363,616
  DILUTED                                                    1,475,523         1,436,403
========================================================================================
</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:                                      2002 - UNAUDITED  2001 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                    <C>                    <C>
Interest and Fees on Loans                             $     8,363,058         8,709,592
Other Interest Income                                        3,890,183         3,066,777
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                12,253,241        11,776,369
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         4,188,047         6,327,757
Interest on Repurchase Agreements                                3,225                 -
Interest on Short-Term Debt                                         64            84,790
Interest on Long-Term Debt                                   1,228,139           963,860
Interest on Subordinated Debentures                            372,782                 -
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                5,792,257         7,376,407
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           6,460,984         4,399,962
PROVISION FOR LOAN LOSSES                                     (402,500)         (453,026)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            6,058,484         3,946,936
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 336,070           319,174
Net Gain on Loans Sold                                         243,248           142,473
Realized Gain on Securities                                    255,758                 -
Real Estate Sales Commission Income                            111,513                 -
Insurance Commission Income                                     56,037            25,431
Rental Income, Net                                              75,280            56,497
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                    1,077,906           543,575
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                            1,860,455         1,368,657
Occupancy Expenses                                             269,219           199,563
Furniture and Equipment Expense                                338,678           259,513
Advertising                                                    142,510            80,088
Data Processing Expense                                        376,322           326,678
Other                                                        1,151,986           609,690
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  4,139,170         2,844,189
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                              2,997,220         1,646,322
PROVISION FOR INCOME TAXES                                    (553,411)         (323,897)
----------------------------------------------------------------------------------------
       NET INCOME                                      $     2,443,809         1,322,425
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                $          1.77              0.97
  DILUTED                                                         1.66              0.93
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,380,356         1,364,570
  DILUTED                                                    1,473,569         1,427,710
========================================================================================
</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, 2002 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2001 (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, 2000          1,465,512   14,251,461      89,677    2,569,576  (1,151,623)     17,224,603

ESOP Shares Allocated                       --           --           --           --      61,529          61,529

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Losses
        Arising During the Period
          (Net of $251,218 Income Tax)       --           --     (401,015)         --          --        (401,015)
      Less: Reclassification Adjustment
          (Net of $34,746 Income Tax)        --           --      (56,691)         --          --         (56,691)
                                                                                                     ------------
                                                                                                         (457,706)

  Net Income                                 --           --           --   1,957,411          --       1,957,411
                                                                                                     ------------
        Total Comprehensive Income           --           --           --          --          --       1,499,705
                                      ----------  ----------     ---------  ---------  -----------   ------------
Balance at December 31, 2001           1,465,512  14,251,461     (368,029)  4,526,987  (1,090,094)     18,785,837

ESOP Shares Allocated                        --           --           --          --      20,269          20,269

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Gains
        Arising During the Period
          (Net of $727,681 Income Tax)       --           --    1,181,025          --          --       1,181,025
      Less: Reclassification Adjustment
          (Net of $73,766 Income Tax)        --           --       73,766          --          --          73,766
                                                                                                     ------------
                                                                                                        1,254,791

  Net Income                                 --           --           --   2,443,809          --       2,443,809
                                                                                                     ------------
        Total Comprehensive Income           --           --           --          --          --       3,698,600
                                      ----------  ----------     ---------  ---------  ----------    ------------
Balance at September 30, 2002          1,465,512  14,251,461       886,762  6,970,796  (1,069,825)     22,504,706
                                      ==========  ==========     =========  =========  ==========    ============

</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,
                                                                               ----------------------------------
                                                                               2002 - UNAUDITED  2001 - UNAUDITED
                                                                               ----------------  ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>                <C>
  Net Income                                                                      $   2,443,809        1,322,425
  Items Not Affecting Cash:
    Depreciation                                                                        361,993          281,732
    (Increase) Decrease in Accrued Interest                                            (122,363)         202,210
    Deferred Income Taxes (Benefit)                                                     (86,167)        (115,714)
    Provision for Loan and Lease Losses                                                 402,500          453,026
    (Increase) Decrease in Prepaid Expenses and Accounts Receivable                     100,541          (17,086)
    Increase (Decrease) in Interest Payable                                               7,528           (5,713)
    Increase (Decrease) in Accounts Payable and Accrued Expenses                        338,970           10,751
    Increase (Decrease) in Deferred Loan Fees, Net                                      117,088           (8,511)
    Realized (Gain) on Securities                                                      (255,758)               -
    Discount Accretion                                                                 (398,579)        (296,748)
    Earned ESOP Shares                                                                   20,269           71,860
    FHLB Stock Dividends                                                                (76,100)        (107,700)
    Net (Increase) Decrease in Loans Held for Sale                                     (923,280)      (1,106,380)
-----------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                                       1,930,451          684,152
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Held-to-Maturity Investments                                          (20,357,390)               -
  Purchase of Available-for-Sale Investments                                         (5,897,039)     (35,624,027)
  Proceeds from Maturities of Held-to-Maturity Investments                            8,000,000       10,000,000
  Proceeds from Maturities of Available-for-Sale Investments                         11,484,105       14,490,740
  Proceeds from Sale of Available-for-Sale Investments                                  673,487                -
  Principal Payments on Mortgage-backed Securities - AFS                              3,353,845                -
  (Increase) Decrease in Federal Funds Sold                                          15,325,000       (6,135,000)
  (Increase) in Short-Term Interest Bearing Deposits                                   (568,390)        (136,503)
  (Increase) in Loans Receivable, Net                                               (20,399,872)      (1,321,190)
  Purchases of Premises and Equipment                                                  (551,120)        (207,870)
  Purchases of Stock in Service Bureau                                                        -         (800,009)
  Purchases of Federal Home Loan Bank Stock                                                   -         (500,000)
-----------------------------------------------------------------------------------------------------------------
    NET CASH (USED) BY INVESTING ACTIVITIES                                          (8,937,374)     (20,233,859)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase (Decrease) in Deposits                                                (1,042,735)      18,118,333
  Net Increase in Advances by Borrowers for Taxes and Insurance                         158,095          199,364
  Net Increase in Repurchase Agreements                                                 708,936                -
  Repayment of Debt                                                                           -          (43,910)
  Repayment of FHLB Advances                                                             (8,844)     (15,661,417)
  Proceeds from FHLB Advances                                                         5,936,560       16,997,168
-----------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                                         5,752,012       19,609,538
-----------------------------------------------------------------------------------------------------------------
      NET INCREASE IN CASH                                                           (1,254,911)          59,831
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD                                        5,252,689        4,715,833
-----------------------------------------------------------------------------------------------------------------
      CASH AND DUE FROM BANKS AT END OF PERIOD                                    $   3,997,778        4,775,664
=================================================================================================================

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
  Net of Deferred Tax Liability                                                   $   1,254,791          445,430
Acquisition of Real Estate Property through Foreclosure of Related Loans          $   1,516,904          495,129
=================================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash Paid During the Period for:
    Income Taxes                                                                  $   1,232,381          394,077
    Interest                                                                      $   5,784,729        7,382,120
=================================================================================================================
</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. (the "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  (the  "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 (the "Leasing Corp") was
     incorporated  under the laws of the State of  Tennessee  for the purpose of
     lease financing.  In January 2002, State of Franklin Real Estate, Inc. (the
     "Real Estate  Company")  was  incorporated  for the purpose of selling real
     estate.  The Real Estate Company and John Sevier Title Services,  Inc. (the
     "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 nine months ended September 30, 2002 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, 2001.


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,  2002
     consolidated financial statements.


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

     Fixed assets at September 30, 2002, and December 31, 2001 are summarized as
     follows:

<TABLE>
<CAPTION>
                                                                2002          2001
                                                            -----------   -----------
<S>                                                         <C>           <C>
     Land                                                     1,450,000     1,450,000
     Buildings and Leasehold Improvements                     3,223,558     3,040,756
     Furniture, Fixtures and Equipment                        2,460,294     2,091,976
                                                            -----------   -----------
                                                              7,133,852     6,582,732
     Less:  Accumulated Depreciation                          1,625,545     1,263,552
                                                            -----------   -----------
                                                              5,508,307     5,319,180
                                                            ===========   ===========
</TABLE>


                                        8

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

     Loans  receivable at September  30, 2002 and December 31, 2001,  consist of
     the following:

<TABLE>
<CAPTION>
                                                   2002             2001
                                             ---------------  ---------------
<S>                                            <C>              <C>
  First Mortgage Loans                           58,461,846       54,554,665
  Construction Loans                             28,715,388       20,163,050
  Consumer Loans                                 13,941,466       12,536,061
  Participation Loans, Net                          487,088          503,354
  Commercial Loans                               66,453,453       56,028,216
  Credit Line Advances                              570,164          710,137
  Lease Finance                                   1,407,077        1,342,242
                                             ---------------  ---------------

    Gross Loans and Leases Receivable           170,036,482      145,837,725
                                             ---------------  ---------------

  Less:
    Undisbursed Portion of Loans in Process    ( 11,779,395)    (  6,606,444)
    Net Deferred Loan Origination Fees         (    258,036)    (    140,949)
    Accumulated General Loan Loss Allowance    (  1,407,316)    (  1,473,855)
                                             ---------------  ---------------
                                               ( 13,444,747)    (  8,221,248)
                                             ---------------  ---------------

  Loans and Leases Receivable, Net              156,591,735      137,616,477
                                             ===============  ===============

</TABLE>
     An analysis of the allowance for loan and lease losses at September 30,
     2002 and December 31, 2001 is as follows:

<TABLE>
<CAPTION>
                                                  2002              2001
                                              --------------   --------------
<S>                                              <C>              <C>
    Balance - Beginning of Period                 1,473,855        1,062,511
    Provision for Loan and Lease Losses             402,500          589,902
    Loans and Leases Charged-Off                 (  469,382)      (  181,508)
    Charged-Off Loan and Lease Recoveries               343            2,950
                                              --------------   --------------

    Balance - End of Period                       1,407,316        1,473,855
                                              ==============   ==============
</TABLE>


     The gross  amount of  participation  loans  serviced  by State of  Franklin
     Savings Bank was $973,750 at September 30, 2002 and  $1,006,596 at December
     31, 2001.

     The Bank had $1.1 million in  non-performing  loans at  September  30, 2002
     compared to $2.8 million at December 31, 2001.


                                        9

<PAGE>
NOTE  6     FEDERAL  REGULATION
-------     -------------------

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

<TABLE>
<CAPTION>
                                                           For Capital
                                                            Adequacy
                                                            Purposes
                                                          And To Be Well
                                                         Capitalized Under
                                                         Prompt Corrective
                                         Actual          Action Provision
                                     ----------------    ----------------
In Thousands                         Amount     Ratio    Amount    Ratio
---------------------------          ----------------    ----------------
<S>                                  <C>        <C>      <C>       <C>
As of September 30, 2002:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        21,204     11.67%   >=18,167  10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        19,775     10.89%   >=10,900   6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       19,775      7.54%   >=13,121   5.0%

As of December 31, 2001:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        18,680     11.25%   >=16,602  10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        17,244     10.39%   >= 9,961   6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       17,244      7.44%   >=11,588   5.0%


</TABLE>

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

<TABLE>
<CAPTION>
                                                           For Capital
                                                            Adequacy
                                                            Purposes
                                                         And To Be Well
                                                         Capitalized Under
                                                         Prompt Corrective
                                          Actual         Action Provision
                                     -----------------   -----------------
In Thousands                         Amount    Ratio     Amount    Ratio
---------------------------          ----------------   -----------------
<S>                                  <C>        <C>      <C>       <C>
As of September 30, 2002:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        30,906     16.95%   >=18,231  10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        28,624     15.70%   >=10,939   6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       28,624     10.85%   >=13,197   5.0%

As of December 31, 2001:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        28,392     17.03%   >=16,671  10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        25,224     15.13%   >=10,003   6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       25,224     10.80%   >=11,675   5.0%

</TABLE>


                                       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 and funded for 1997. On February 28, 1998,  5,236 shares of the
     Savings  Bank  with a fair  value  of  $57,600  were  issued  for the  1997
     contribution. The Savings Bank stock was exchanged for Company stock.

     During  the third  quarter of 1998,  the ESOP  borrowed  $700,000  from the
     Company and used the funds to purchase 63,636 shares of common stock of the
     Company at $11 per share. Note payments were $8,218 per month for ten years
     with a fixed  interest  rate of 7.25%.  The note  balances  outstanding  at
     December 31, 2000 and 1999 were  $571,637  and  $626,615,  respectively.  A
     related  loan was  granted for the  purpose of  leveraging  the ESOP in the
     amount of $700,000 with similar terms and collaterized with stock. The note
     balances  outstanding  at  December  31,  2000 and 1999 were  $571,637  and
     $626,615, respectively.

     On June 30, 2000, the ESOP borrowed an additional $599,994 from the Company
     and used the funds to purchase 44,444  additional shares of common stock of
     the Company at $13.50 per share.  Note  payments  were $7,280 per month for
     ten years with a fixed interest rate of 8.00%. The note balance outstanding
     at December 31, 2000 was $579,985.  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, 2002 was $951,825.  Also, in November
     2001,  the  Company  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, 2002,  there was a
     $118,000 balance outstanding on the line of credit.

     Shares owned by the ESOP at September 30, 2002 totaled 162,848. 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,
                                                           2002          2001
                                                    -------------  -------------
      Number of Shares
        Released and Allocated since Inception             49,340         43,654
        Committed to be Released                           10,687          5,687
        Suspense                                           86,835         88,814

      Fair Value
        Released and Allocated since Inception            888,120        707,195
        Committed to be Released                          192,366         92,129
        Suspense                                        1,563,030      1,438,787

     Contributions to the ESOP are as follows:

                                                     September 30,  December 31,
                                                             2002           2001
                                                    -------------  -------------
      Compensation Expense                                246,000        264,000
      Contributions                                       246,000        264,000

     For the purpose of computing  earnings per share, all ESOP shares committed
     to be released are considered outstanding.

                               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, 2002        76,014    54,405     $11.62
                                                 During 2002             7,000     7,000      16.20
     Options Granted - Management                January 1, 2002       182,166   129,518      11.64
                                                 During 2002            27,473        --      16.63
                                                                       -------   -------
     Options Outstanding - September 30, 2002                          292,653   190,923     $12.21
                                                                       =======   =======
</TABLE>
                                       11

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

     Deposit balances are summarized as follows:

<TABLE>
<CAPTION>
                                         September 30, 2002              December 31, 2001
                                    -----------------------------  -----------------------------
                                      Rate    Amount      Percent    Rate     Amount     Percent
                                    ------- -----------  --------  ------- -----------  --------
<S>                                    <C>  <C>            <C>        <C>  <C>            <C>
     Passbook                          2.65  61,874,731     31.08     2.60  41,603,020     20.79
     Interest-Free Checking              --  10,658,270      5.35       --  18,216,284      9.10
     NOW                               1.99  12,099,604      6.08     2.00   8,512,548      4.26
     Money Market Deposit              2.20  36,219,539     18.19     2.21  46,020,212     22.99
                                            -----------  --------          -----------  --------
                                            120,852,144     60.70          114,352,064     57.14
                                            -----------  --------          -----------  --------
     Fixed Term Certificate Accounts
      Balances $100,000 or greater     3.37  20,367,778     10.23     4.45  22,237,766     11.11
      Balances less than $100,000      3.16  57,874,416     29.07     4.32  63,547,244     31.75
                                            -----------  --------          -----------  --------
                                             78,242,195     39.30           85,785,010     42.86
                                            -----------  --------          -----------  --------
                                            199,094,339    100.00          200,137,074    100.00
                                            ===========  ========          ===========  ========
</TABLE>

     The contractual  maturity of certificate accounts at September 30, 2002 and
     December 31, 2001, is as follows:

         Period Ending September 30, 2002          Year Ending December 31, 2001
         --------------------------------          -----------------------------
            2002             17,969,966                 2002          77,330,432
            2003             43,979,131                 2003           5,968,854
            2004              9,948,903                 2004           1,323,611
            2005              5,437,309                 2005           1,162,113
            2006 and After      906,886                 2006 and After        --
                             ----------                               ----------
                             78,242,195                               85,785,010
                             ==========                               ==========


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

     Advances  from  FHLB  are  summarized  as  follows  for the  periods  ended
     September 30, 2002 and December 31, 2001:


         Contractual Maturity                            2002            2001
         --------------------                        -----------     -----------

         Convertible Fixed Rate (Within 10 Years)      35,000,000     30,000,000
         Matched-Funding (30-Year Amortizing)           1,168,711        240,995

         Weighted Average Rate                              4.85%          4.95%


     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.


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

     The amortized cost and fair value of investment securities held-to-maturity
     and  available-for-sale at September 30, 2002, by contractual maturity, are
     shown below.  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>
NOTE 10     CONTINUED
-------     ---------
     September 30, 2002:
<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:
               After one year
                 but within five years        1,048,199         418           --     1,048,617
               After five years
                 but within ten years           995,800      14,415           --     1,010,215
               After ten years
                 but within fifteen years       999,751      32,600           --     1,032,351
               After 20 years                 1,045,226       4,416           --     1,049,642

          Collateralized Mortgage Obligations:
               After one year
                 but within five years        1,119,943      26,414           --     1,146,357
               After ten years
                 but within fifteen years       291,303      18,692           --       309,995
               After fifteen years
                 But within 20 years          1,342,306      20,001           --     1,362,307

              Municipal Securities Maturing:
               Within one year                  125,000       1,511           --       126,511
               After one year
                 but within five years          550,000      37,386           --       587,386
               After five years
                 but within ten years         2,678,878     178,336           --     2,857,214
               After ten years
                 but within fifteen years    11,774,635     630,459           --    12,405,094
               After fifteen years
                 but within twenty years      4,013,278     245,988           --     4,259,266
               After 20 years                 1,070,301      31,119           --     1,101,420

         Corporate Securities Maturing:
               After five years
                 but within ten years         5,100,000      13,593       43,665     5,069,928
               After twenty years             1,733,255      48,149           --     1,781,404

          Equity Securities
                Callable within one year     17,000,000          --      175,000    16,825,000
                Callable after one year
                  but within five years       4,934,501     249,499           --     5,184,000
                Callable after five years
                  but within ten years        1,000,000      30,000           --     1,030,000

          Other
               After 20 years                   815,009      75,311           --       890,320
                                             ----------   ---------    ---------   -----------
                  Total Available-for-Sale   57,637,385   1,658,307      218,665    59,077,027
                                             ==========   =========    =========   ===========
     Held-to-Maturity:
          United States Government
            Agency Securities Maturing:
               After five years
                 but within ten years           834,625       2,882           --       837,507
               After ten years
                 but within fifteen years     2,515,678      30,096           --     2,545,774
               After 20 years                 1,934,218      28,196           --     1,962,414

          Collateralized Mortgage Obligations:
               After five years
                 but within ten years         1,947,011      29,065           --     1,976,076
               After ten years
                 but within fifteen years     5,821,170     114,341           --     5,935,511
               After 20 years                 2,044,275      35,921        2,141     2,078,055

          Corporate Securities Maturing:
               After one year
                 but within five years        1,042,198      40,034           --     1,082,232
               After five years
                 but within ten years           500,504          --       26,021       474,483
               After twenty years             3,168,432     218,028           --     3,386,460
                                             ----------     -------    ---------   -----------
                  Total Held-to-Maturity     19,808,111     498,563       28,162    20,278,512
                                             ==========     =======    =========   ===========

</TABLE>
                                       13
<PAGE>

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

     Earnings per share for three  months ended and nine months ended  September
     30, 2002,  compared with the same periods ended  September 30, 2001, are as
     follows:
<TABLE>
<CAPTION>
                                                Three Months Ended         Nine Months Ended
                                                   September 30,             September 30,
                                                  2002       2001           2002        2001
                                              ---------   ---------      ---------   ---------
<S>                                           <C>         <C>            <C>         <C>
Net Income                                      975,944     549,380      2,443,809   1,322,425

Average Basic Shares Outstanding              1,381,397   1,363,616      1,380,356   1,364,570

Basic Earnings Per Share                           0.71        0.40           1.77        0.97
                                              =========   =========      =========   =========

Net Income                                      975,944     549,380      2,443,809   1,322,425

Average Basic Shares Outstanding              1,381,397   1,363,616      1,380,356   1,364,570
Dilutive Effect Due to Stock Options             94,126      72,787         93,213      63,140
                                              ---------   ---------      ---------   ---------
Average Shares Outstanding, as Adjusted       1,475,523   1,436,403      1,473,569   1,427,710

Diluted Earnings Per Share                         0.66        0.38           1.66        0.93
                                              =========   =========      =========   =========
</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
     State of  Franklin  Bancshares,  Inc.  (the  "Company").  State of Franklin
     Savings Bank (the "Savings Bank") and State of Franklin Leasing Corporation
     (the "Leasing Corp") represent  virtually all of the assets of the 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,  2002,  assets of the  Company  totaled  $267.8  million
     reflecting an increase of $9.9 million or 4% since  December 31, 2001.  The
     growth in assets has been funded  primarily by a $5.9  million  increase in
     Federal Home Loan Bank  advances  and a $2.4  million  increase in retained
     earnings.

     LOANS
     -----

     Loans  outstanding  totaled  $161.5  million at September  30,  2002.  This
     represented an increase of 14% from the December 31, 2001 outstanding loans
     of $141.6 million.

     Commercial  loans increased $10.4 million to $66.5 million at September 30,
     2002,  an increase of 19% from $56.0  million at December  31,  2001.  Real
     estate  construction  lending  totaled  $28.7  million  compared with $20.2
     million at December  31,  2001,  reflecting  an increase of $8.5 million or
     42%.  Consumer  loans of $13.9 million at September 30, 2002 increased $1.4
     million or 11% from $12.5  million at December 31,  2001.  During the first
     nine months of 2002,  first mortgage  residential  loans increased to $58.5
     million or 7% from $54.6 million at December 31, 2001.  The loan  portfolio
     mix at  September  30, 2002  consists  of 34%  residential  mortgages,  40%
     commercial, 17% real estate construction, and 9% consumer loans.

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

     Investment  securities  totaled $78.9  million at September  30, 2002.  The
     investment  portfolio  at quarter end  consisted  of $22.1  million in debt
     securities issued by the U. S. Government or Federal Agencies,  $23 million
     in preferred stock issued by Federal Agencies,  $21.3 million in securities
     issued by state, county, or municipalities,  and $11.6 million in corporate
     securities.

     At September 30, 2002, securities categorized as available-for-sale totaled
     $59.1 million while the  held-to-maturity  securities totaled $19.8 million
     compared  to  $63.8  million  in  available-for-sale  and $9.7  million  in
     held-to-maturity   at  December  31,  2001.  At  September  30,  2002,  the
     available-for-sale  portfolio had net unrealized  gains of $1,439,642 while
     our held-to-maturity securities had $470,401 in net unrealized gains.

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

     No loans were past due 90 days or more at September  30, 2002 compared with
     $881,000  at  December  31,  2001.  Nonaccrual  loans were $1.1  million at
     September  30, 2002  compared  with $2.8 million at December 31, 2001.  The
     reserve for loan and lease losses was  $1,407,316 at September 30, 2002, or
     0.89% of loans and leases  outstanding,  net of  unearned  income and loans
     held for sale,  compared  to  $1,473,855  or 1.06% at  December  31,  2001.
     Management  believes the  allowance  for loan losses is adequate to provide
     for potential loan losses.

     DEPOSITS
     --------

     Total deposits at September 30, 2002 of $199.1 million, reflected a decline
     of $1 million or a .5% decrease  from $200.1  million at December 31, 2001.
     Noninterest bearing demand deposits totaled $10.7 million at September 30,
     2002, a decrease of $7.6 million from December 31, 2001.  Interest  bearing
     deposits increased $6.5 million to $188.4 million at September 30, 2002.

                                       15

<PAGE>
     CAPITAL
     -------

     Tier 1  capital  for the  Savings  Bank at  September  30,  2002 was  $19.8
     million.  At September 30, 2002,  all capital  ratios were in excess of the
     regulatory minimums, with the Savings Bank's Tier 1, total risk-based,  and
     leverage ratios of 10.89%, 11.67% and 7.54%, respectively.

     Tier 1 capital for the Company at  September  30, 2002,  was $28.6  million
     with Tier 1, total risk-based,  and leverage ratios of 15.70%,  16.95%, and
     10.85%, 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  totaling $60 million at September
     30, 2002.

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

     The  Company  had net  income  of  $975,944  for the  three  months  ending
     September  30, 2002,  compared with $549,380 for the same period last year,
     resulting in an increase of 78%. For the nine months  ended  September  30,
     2002, net income was $2,443,809 compared with $1,322,425 for the first nine
     months  of 2001  reflecting  an 85%  increase.  For the nine  months  ended
     September  30,  2002,  net income per diluted  share was $1.66  compared to
     earnings per share of $0.93 for the nine months ended  September  30, 2001.
     Return on average  assets  was 1.26% and the  return on average  equity was
     16.62% for the nine months ended September 30, 2002, compared with .82% and
     9.49%, respectively, for the same period in 2001.

     Noninterest income increased $534,331, or 98%, during the nine months ended
     September  30,  2002,  compared  the same  period  last year as a result of
     increases in all categories  included in noninterest  income. Gain on loans
     sold  increased  mainly  due  to a  lower  interest  rate  environment  and
     refinancing   into  the  secondary   market.   Lower  interest  rates  also
     contributed to an increase in realized  gains on securities  resulting from
     the exercise of call features on investments. Additional noninterest income
     was generated with the creation of State of Franklin Real Estate during the
     first  quarter  of  the  current  year.  Other  areas  showing  significant
     increases were other fees and service charges,  insurance commissions,  and
     rental income.

                                       16

     <PAGE>


     Noninterest expense was $4,139,170 for the nine months ending September 30,
     2002, an increase of 46% over the 2001 period,  resulting from increases in
     compensation  and  related  benefits,   furniture  and  equipment  expense,
     occupancy  expense,   advertising,   data  processing  expense,  and  other
     operating expenses.


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

     Interest  income and  interest  expense  both  increased  from 2001 to 2002
     resulting  primarily  from  increases in both  earning  assets and interest
     bearing  liabilities and recent  declines in interest  rates.  Net interest
     income  of $6.5  million  for the nine  months  ended  September  30,  2002
     reflects an increase of $2.1 million or 47% over the same period last year.
     For the nine months  ending  September  30, 2002,  average  earning  assets
     increased $42.1 million or 20% while average interest  bearing  liabilities
     increased $39 million,  or 21%,  compared with the same period in 2001. The
     taxable  equivalent  yield on earning  assets  declined 95 basis  points to
     6.90% for the first nine  months of 2002  compared  with the same period in
     2001 while the cost on  interest  bearing  liabilities  declined  182 basis
     points to 3.39%.  Consequently,  the taxable equivalent net interest margin
     based on average  earning  assets  increased  to 3.80% for the nine  months
     ending September 30, 2002 compared with 3.16% for the same period in 2001.


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

     During the nine months ended September 30, 2002, the provision for possible
     loan losses was $402,500  compared  with  $453,026 for the same period last
     year. Net loan  charge-offs  for the nine months ended  September 30, 2002,
     were $469,039  compared with $171,852  during the same period in 2001.  The
     allowance for possible loan losses  represented .89% of total loans, net of
     mortgage loans  held-for-sale,  at September 30, 2002,  compared to .98% at
     September 30, 2001.  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, 2002, the provision for federal and
     state income taxes was  $553,411,  an increase of $229,514  from 2001.  The
     increase  is due to the net  effect  of a  higher  level of  pretax  income
     combined  with an increase in the state excise tax rate which was partially
     offset by higher levels of taxfree interest income generated from purchases
     of  municipal  securities  and  tax  exempt  dividends  from  purchases  of
     preferred stock in federal agencies.


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

     The  Company's  noninterest  income was  $1,077,906  during the nine months
     ended  September  30,  2002,  an  increase  of  $534,331  or 98%  from  the
     comparable  2001 period.  The increase  resulted from  increases in several
     areas. Other fees and service charges increased $16,896, gain on loans sold
     increased  $100,775,   realized  gain  on  securities  increased  $255,758,
     insurance  commission income increased $30,606, and rental income increased
     $18,783.  In addition,  with the creation of State of Franklin  Real Estate
     during first  quarter of 2002,  $111,513 in real estate  sales  commissions
     were generated for the nine months ended September 30, 2002.


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

     Noninterest  expense  totaled  $4,139,170  for the nine month period ending
     September  30, 2002, an increase of $1,294,981 or 46%. The increase was the
     result of  increases  in  compensation  and  related  benefits,  occupancy,
     furniture and equipment expense,  advertising,  data processing,  and other
     operating  expenses of $491,798,  $69,656,  $79,165,  $62,422,  49,644, and
     $542,296, respectively.

                                       17

<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 a date within
     90  days  of the  filing  date  of this  quarterly  report.  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

                    99.1 Certification  Pursuant to 18 U.S.C.  Section  1350, as
                         Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley
                         Act of 2002,  signed by Randal R. Greene,  President of
                         State of Franklin  Bancshares,  Inc.  on  November  13,
                         2002.

                    99.2 Certification  Pursuant to 18 U.S.C.  Section  1350, as
                         Adopted  Pursuant to Section 906 of the  Sarbanes-Oxley
                         Act of 2002,  signed by  Charles  E.  Allen,  Jr.,  the
                         Chairman  of the  Board  and  Chief  Executive  Officer
                         (Principal Executive, Financial and Accounting Officer)
                         of State of Franklin  Bancshares,  Inc. on November 13,
                         2002.


                  (b) The  Company  did  not file any reports on Form 8-K during
                      the quarter ended September 30, 2002.





                                       18

<PAGE>




                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.





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





    November 13, 2002                         /s/ Randal R. Greene
---------------------------                   ----------------------------------
         (Date)                               Randal R. Greene, President





    November 13, 2002                         /s/ Charles E. Allen, Jr.
---------------------------                   ----------------------------------
         (Date)                               Charles E. Allen, Jr.,
                                              Chairman of the Board
                                              and Chief Executive Officer
                                              (Principal Executive, Financial
                                              and Accounting Officer)



















                                       19


<PAGE>


                           Certification of President
                         Pursuant to Section 302 of the
                           Sarbanes-Oxley Act of 2002

I, Randal R. Greene, certify that:

     1.   I have  reviewed  this  quarterly  report  on Form  10-QSB of State of
          Franklin Bancshares, Inc. ("State of Franklin");

     2.   Based on my  knowledge,  this  quarterly  report  does not contain any
          untrue  statement of a material  fact or omit to state a material fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this quarterly report; and

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this quarterly report,  fairly present in all
          material respects the financial  condition,  results of operations and
          cash flows of State of Franklin as of, and for, the periods  presented
          in this quarterly report.

     4.   The registrant's  other  certifying  officer and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               quarterly report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          c)   presented  in this  quarterly  report our  conclusions  about the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed,  based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent function):

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

     6.   The registrant's other certifying officer and I have indicated in this
          quarterly  report  whether  or not there were  significant  changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.



Date:  November 13, 2002                          /s/  Randal R. Greene
                                                 ------------------------------
                                                  Randal R. Greene
                                                  President

                                       20
<PAGE>


                    Certification of Chief Executive Officer
                         Pursuant to Section 302 of the
                           Sarbanes-Oxley Act of 2002

I, Charles E. Allen, Jr., certify that:

     1.   I have  reviewed  this  quarterly  report  on Form  10-QSB of State of
          Franklin Bancshares, Inc. ("State of Franklin");

     2.   Based on my  knowledge,  this  quarterly  report  does not contain any
          untrue  statement of a material  fact or omit to state a material fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this quarterly report; and

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this quarterly report,  fairly present in all
          material respects the financial  condition,  results of operations and
          cash flows of State of Franklin as of, and for, the periods  presented
          in this quarterly report.

     4.   The registrant's  other  certifying  officer and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               quarterly report is being prepared;

          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          c)   presented  in this  quarterly  report our  conclusions  about the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officer and I have disclosed,  based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's  board  of  directors  (or  persons
          performing the equivalent function):

          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

     6.   The registrant's other certifying officer and I have indicated in this
          quarterly  report  whether  or not there were  significant  changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.



Date:  November 13, 2002                   /s/ Charles E. Allen, Jr.
                                           -------------------------------------
                                           Charles E. Allen, Jr.
                                           Chief Executive Officer (Principal
                                           Executive, Accounting and Financial
                                           Officer)


                                       21

<PAGE>


                                                                    EXHIBIT 99.1
                                  CERTIFICATION

                       Pursuant to 18 U.S.C. Section 1350,
                             As Adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002


     Pursuant to 18 U.S.C.  Section 1350, as adopted  pursuant to Section 906 of
the  Sarbanes-Oxley  Act of 2002, and in connection with the quarterly report on
Form  10-QSB of State of  Franklin  Bancshares,  Inc.  (the  "Company")  for the
quarter  ended  September 30, 2002,  as filed with the  Securities  and Exchange
Commission on the date hereof (the "Report"), the undersigned, Randal R. Greene,
President of the Company,  hereby  certifies  that (1) the Report fully complies
with the  requirements of Section 13(a) or 15(d) of the Securities  Exchange Act
of 1934, and (2) the information contained in the Report fairly presents, in all
material  respects,  the  financial  condition  and results of operations of the
Company.

     This Certification is signed on November 13, 2002.




                                            /s/ Randal R. Greene
                                            ------------------------------------
                                            Randal R. Greene, President




<PAGE>


                                                                    EXHIBIT 99.2
                                  CERTIFICATION

                       Pursuant to 18 U.S.C. Section 1350,
                             As Adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002


     Pursuant to 18 U.S.C.  Section 1350, as adopted  pursuant to Section 906 of
the  Sarbanes-Oxley  Act of 2002, and in connection with the quarterly report on
Form  10-QSB of State of  Franklin  Bancshares,  Inc.  (the  "Company")  for the
quarter  ended  September 30, 2002,  as filed with the  Securities  and Exchange
Commission on the date hereof (the "Report"), the undersigned, Charles E. Allen,
Jr., the Chairman of the Board and Chief Executive Officer (Principal Executive,
Financial and Accounting  Officer)of the Company,  hereby certifies that (1) the
Report fully  complies  with the  requirements  of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and (2) the information contained in the Report
fairly presents,  in all material respects,  the financial condition and results
of operations of the Company.

     This Certification is signed on November 13, 2002.




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