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

                                   FORM 10-QSB

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

          FOR THE QUARTERLY PERIOD ENDED:      JUNE 30, 2004
                                               -------------

                                       OR
                                       --

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


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


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

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


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


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


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


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

                                    YES     X            NO
                                          ----

                                    1,465,512
                   ------------------------------------------
     (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 11, 2004)


           TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):

                                    YES                  NO    X
                                                             ----


<PAGE>


                        STATE OF FRANKLIN BANCSHARES, INC

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

        ITEM 1.   FINANCIAL STATEMENTS                                                       PAGE
                                                                                           -------
<S>                                                                                           <C>
                  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                     JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003 (AUDITED)                 3

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

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

                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                     SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND 2003 (UNAUDITED)           7

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                       8


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

         ITEM 3.  CONTROLS AND PROCEDURES                                                     17



PART II. OTHER INFORMATION

         ITEM 1.   LEGAL PROCEEDINGS                                                          18

         ITEM 2.   CHANGES IN SECURITIES                                                      18

         ITEM 3.   DEFAULT UPON SENIOR SECURITIES                                             18

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

         ITEM 5.   OTHER INFORMATION                                                          18

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

         SIGNATURES                                                                           19

</TABLE>





















                                        2

<PAGE>

PART 1 - FINANCIAL INFORMATION

     ITEM 1. FINANCIAL STATEMENTS


                       STATE OF FRANKLIN BANCSHARES, INC.
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>


                                                                     JUNE 30,        DECEMBER 31,
                             ASSETS                           2004 - UNAUDITED     2003 - AUDITED
-------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>
Cash and Due from Banks                                          $   4,865,907          3,764,363
Federal Funds Sold                                                  27,605,000         25,040,000
Short-Term Interest Bearing Deposits                                 3,564,837          3,336,670
-------------------------------------------------------------------------------------------------
   Total Cash and Cash Equivalents                                  36,035,744         32,141,033
-------------------------------------------------------------------------------------------------
Investments - HTM
   (Estimated Market 2004 - $46,125,559 and 2003 - $34,274,290)     47,014,121         34,031,676
Investments - AFS                                                   58,167,233         63,375,496
Loans Held for Sale                                                    909,315            413,179
Loans and Leases Receivable                                        153,441,885        150,646,605
   Less: Allowance for Loan and Lease Losses                      (  1,794,949)      (  1,870,279)
-------------------------------------------------------------------------------------------------
   Loans and Leases Receivable, Net                                151,646,936        148,776,326
-------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net                                     1,432,805          1,366,640
Land, Buildings & Equip at Cost Less Accum Depr
   of $2,379,522 in 2004 and $2,091,874 in 2003                      7,200,301          6,218,358
Prepaid Expense and Accounts Receivable                                160,238            108,260
Deferred Tax Assets                                                  1,597,995          1,141,342
FHLB Stock                                                           2,401,800          2,354,800
Investment in Service Bureau at Cost                                   815,009            815,009
Other Real Estate Owned                                              1,139,651          1,152,919
Other Assets                                                           171,926            159,000
-------------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                   $ 308,693,074        292,054,038
=================================================================================================
             LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits                                           $  12,949,160         12,114,590
Interest-Bearing Deposits                                          214,778,981        209,877,896
Advances to Borrowers for Taxes and Insurance                          281,704            103,632
Accrued Interest on Deposits                                           122,422            141,757
Accrued State and Federal Taxes                                    (    68,160)       (   133,129)
Other Accounts Payable and Accrued Expenses                            664,524            537,849
Repurchase Agreements                                                  724,155            536,419
FHLB Long-Term Advances                                             46,195,467         36,210,071
Deferred Credits on REO                                                205,034            173,996
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                         $ 275,853,287        259,563,081
-------------------------------------------------------------------------------------------------

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

STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value                                        1,465,512          1,465,512
Paid-in Capital                                                     14,251,461         14,251,461
Accumulated Other Comprehensive Income                             ( 1,647,304)       (   797,592)
Retained Earnings                                                   11,484,807         10,356,571
  Less: Employee Stock Ownership                                   (   714,689)       (   784,995)
-------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                $  24,839,787         24,490,957
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 308,693,074        292,054,038
=================================================================================================
</TABLE>

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


                                        3
<PAGE>


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

                                                           THREE MONTHS ENDED JUNE 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2004 - UNAUDITED  2003 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                     <C>                    <C>
Interest and Fees on Loans                              $    2,353,706         2,693,268
Other Interest Income                                        1,180,202           832,507
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 3,533,908         3,525,775
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         1,014,116         1,145,798
Interest on Repurchase Agreements                                2,340             3,303
Interest on Short-Term Debt                                        690             2,419
Interest on Long-Term Debt                                     523,498           437,592
Interest on Subordinated Debentures                            109,517           110,027
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                1,650,161         1,699,139
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           1,883,747         1,826,636
PROVISION FOR LOAN LOSSES                                      (10,000)         (113,833)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            1,873,747         1,712,803
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 146,423           135,588
Net Gain on Loans Sold                                          98,431           284,673
Real Estate Sales Commission Income                            106,201            70,522
Insurance Commission Income                                     17,823            24,763
Rental Income, Net                                              25,997            21,336
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                      394,875           536,882
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                              725,515           679,327
Occupancy Expenses                                             105,545           108,904
Furniture and Equipment Expense                                130,147           107,933
Advertising                                                     72,644            37,928
Data Processing Expense                                        156,090           147,135
Other                                                          345,676           274,159
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  1,535,617         1,355,386
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                                733,005           894,299
PROVISION FOR INCOME TAXES                                    (157,202)         (279,843)
----------------------------------------------------------------------------------------
       NET INCOME                                       $      575,803           614,456
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                 $         0.41              0.44
  DILUTED                                                         0.38              0.41
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,397,269         1,387,191
  DILUTED                                                    1,533,126         1,481,549
========================================================================================
</TABLE>


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


                                          4

<PAGE>



                       STATE OF FRANKLIN BANCSHARES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                            SIX MONTHS ENDED JUNE 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2004 - UNAUDITED  2003 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                    <C>                    <C>
Interest and Fees on Loans                             $     4,797,338         5,509,996
Other Interest Income                                        2,324,016         1,763,731
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 7,121,354         7,273,727
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         2,074,090         2,244,807
Interest on Repurchase Agreements                                4,948             7,154
Interest on Short-Term Debt                                        650             2,440
Interest on Long-Term Debt                                     986,626           870,885
Interest on Subordinated Debentures                            217,804           218,421
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                3,284,118         3,343,707
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           3,837,236         3,930,020
PROVISION FOR LOAN LOSSES                                   (   20,000)       (  291,470)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            3,817,236         3,638,550
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 265,333           259,929
Net Gain on Loans Sold                                         170,780           458,893
Realized Gain on Securities                                          -               231
Real Estate Sales Commission Income                            161,482           139,911
Insurance Commission Income                                     29,147            44,638
Rental Income, Net                                              47,011            36,851
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                      673,753           940,453
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                            1,443,468         1,339,801
Occupancy Expenses                                             203,969           200,572
Furniture and Equipment Expense                                253,895           164,022
Advertising                                                    136,068            71,686
Data Processing Expense                                        318,205           256,408
Other                                                          673,182           527,324
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  3,028,787         2,559,813
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                              1,462,202         2,019,190
PROVISION FOR INCOME TAXES                                  (  333,968)       (  573,491)
----------------------------------------------------------------------------------------
       NET INCOME                                      $     1,128,234         1,445,699
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                $           .81              1.04
  DILUTED                                                          .74               .98
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,396,486         1,384,778
  DILUTED                                                    1,522,724         1,479,021
========================================================================================
</TABLE>



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


                                        5


<PAGE>

<TABLE>
<CAPTION>


                       STATE OF FRANKLIN BANCSHARES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 FOR SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2003 (AUDITED)


                                                               Accumulated
                                                                  Other                 Employee
                                      Common        Paid-In   Comprehensive  Retained    Stock
                                       Stock        Capital       Income     Earnings   Ownership        Total
                                  --------------  ----------  -------------  --------   ---------    ------------
<S>                                    <C>         <C>         <C>         <C>         <C>             <C>
Balance at December 31, 2002           1,465,512   14,251,461     252,106   7,711,128  (1,058,450)     22,621,757

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

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

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

ESOP Shares Allocated                         --           --          --          --      70,306          70,306

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Losses
        Arising During the Period
          (Net of $536,471 Income Tax Benefit)--           --    (864,377)         --          --        (864,377)
      Less: Reclassification Adjustment
          (Net of $9,102 Tax)                 --           --      14,665          --          --          14,665
                                                                                                     ------------
                                                                                                         (849,712)

  Net Income                                  --           --          --   1,128,234          --       1,128,234
                                                                                                     ------------
        Total Comprehensive Income            --           --          --          --          --         278,522
                                    ------------   ----------   ---------  ----------   ---------    ------------
Balance at June 30, 2004               1,465,512   14,251,461  (1,647,304) 11,484,807  (  714,689)     24,839,787
                                    ============   ==========   =========  ==========   =========    ============

</TABLE>

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




                                        6


<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    SIX MONTHS ENDED JUNE 30,
                                                                               ----------------------------------
                                                                               2004 - UNAUDITED  2003 - UNAUDITED
                                                                               ----------------  ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>                 <C>
  Net Income                                                                      $   1,128,234        1,445,699
  Items Not Affecting Cash:
    Depreciation                                                                        287,648          167,610
    (Increase) Decrease in Accrued Interest                                             (66,165)          49,722
    Deferred Income Taxes (Benefit)                                                      32,327          (86,957)
    Provision for Loan and Lease Losses                                                  20,000          291,470
    (Increase) Decrease in Prepaid Expenses and Accounts Receivable                     (51,978)          45,776
    Increase (Decrease) in Interest Payable                                             (19,335)         113,519
    Increase in State and Federal Taxes Payable                                          64,969                -
    Increase (Decrease) in Other Accounts Payable and Accrued Expenses                  126,675         (428,441)
    Increase in Deferred Loan Fees, Net                                                  18,854           22,524
    Realized (Gain) on Securities                                                             -             (231)
    Discount Accretion                                                                 (106,876)         (92,866)
    Premium Amortization                                                                323,274          246,363
    Increase in Deferred Gain on Sale of REO                                             31,038                -
    Earned ESOP Shares                                                                   70,306          174,522
    FHLB Stock Dividends                                                                (47,000)         (45,000)
    Net (Increase) in Loans Held for Sale                                              (496,136)      (1,609,392)
-----------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                                      (1,315,835)         294,318
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Held-to-Maturity Investments                                          (22,697,557)      (9,607,148)
  Purchase of Available-for-Sale Investments                                                  -       (6,758,589)
  Proceeds from Maturities of Held-to-Maturity Investments                            6,405,000        3,495,000
  Proceeds from Maturities of Available-for-Sale Investments                          2,226,941        3,423,358
  Principal Payments on Mortgage-backed Securities - HTM                              3,160,002        5,925,765
  Principal Payments on Mortgage-backed Securities - AFS                              1,563,418        1,747,352
  (Increase) Decrease in Loans Receivable, Net                                       (2,896,196)       4,327,547
  Purchases of Premises and Equipment                                                (1,269,591)        (474,443)
-----------------------------------------------------------------------------------------------------------------
    NET CASH (USED) BY INVESTING ACTIVITIES                                         (13,507,983)       2,078,842
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase in Deposits                                                            5,735,655       16,309,741
  Net Increase in Advances by Borrowers for Taxes and Insurance                         178,072          153,208
  Net Increase (Decrease) in Repurchase Agreements                                      187,736         (731,297)
  Repayment of FHLB Advances                                                            (14,604)         (11,841)
  Proceeds from FHLB Advances                                                        10,000,000                -
-----------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                                        16,086,859       15,719,811
-----------------------------------------------------------------------------------------------------------------
      NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            3,894,711       18,092,971
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                        32,141,033       19,822,269
-----------------------------------------------------------------------------------------------------------------
      CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $  36,035,744       37,915,240
=================================================================================================================

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
  Net of Deferred Tax Liability                                                   $    (849,712)        (350,536)
Acquisition of Real Estate Property through Foreclosure of Related Loans          $   1,139,651        1,120,331
=================================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash Paid During the Period for:
    Income Taxes                                                                  $     242,521          983,151
    Interest                                                                      $   3,303,453        3,230,188
=================================================================================================================
</TABLE>


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


                                        7



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

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

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


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

     The accompanying  consolidated financial statements include the accounts of
     the Company and its subsidiaries. All significant intercompany accounts and
     transactions have been eliminated. These financial statements were prepared
     in accordance  with generally  accepted  accounting  principles for interim
     financial  information  and in accordance  with the  instructions  for Form
     10-QSB.  Accordingly,  they do not include all disclosures  necessary for a
     complete   presentation  of  the   consolidated   statements  of  financial
     condition,  income,  cash  flows,  and changes in  stockholders'  equity in
     conformity with generally  accepted  accounting  principles.  However,  all
     adjustments which are, in the opinion of management, necessary for the fair
     presentation of the interim  financial  statements have been included.  All
     such adjustments are of a normal recurring nature.  The statement of income
     for the three months ended June 30, 2004 is not  necessarily  indicative of
     the results which may be expected for the entire year.

     These consolidated  financial statements should be read in conjunction with
     the audited  consolidated  financial  statements  and notes thereto for the
     Company for the year ended December 31, 2003.


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

     In instances where required,  amounts reported in prior period's  financial
     statements  included  herein  have  been  reclassified  to  put  them  on a
     comparable basis to the amounts reported in the June 30, 2004  consolidated
     financial statements.


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

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

                                                            2004          2003
                                                       -----------   -----------
     Land                                                1,580,000     1,580,000
     Buildings and Leasehold Improvements                4,822,524     4,030,608
     Furniture, Fixtures and Equipment                   3,177,299     2,699,624
                                                       -----------   -----------
                                                         9,579,823     8,310,232
     Less:  Accumulated Depreciation                     2,379,522     2,091,874
                                                       -----------   -----------
                                                         7,200,301     6,218,358
                                                       ===========   ===========




                                        8



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

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

                                                   2004             2003
                                              --------------   --------------
  First Mortgage Loans                           49,791,806       49,702,608
  Construction Loans                             24,475,605       21,817,058
  Consumer Loans                                 12,839,549       13,070,617
  Participation Loans, Net                          445,061          458,452
  Commercial Loans                               63,271,063       63,208,012
  Credit Line Advances                            1,566,968        1,185,167
  Lease Finance                                   1,434,654        1,550,376
                                             ---------------  ---------------

    Gross Loans and Leases Receivable           153,824,706      150,992,290
                                             ---------------  ---------------

  Less:
    Undisbursed Portion of Loans in Process     (   120,157)     (   101,875)
    Net Deferred Loan Origination Fees          (   262,664)     (   243,810)
    Accumulated General Loan Loss Allowance     ( 1,794,949)     ( 1,870,279)
                                             ---------------  ---------------
                                                ( 2,177,770)     ( 2,215,964)
                                             ---------------  ---------------

  Loans and Leases Receivable, Net              151,646,936      148,776,326
                                             ===============  ===============

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

                                                    2004             2003
                                              --------------   --------------
    Balance - Beginning of Period                 1,870,279        1,563,320
    Provision for Loan and Lease Losses              20,000          444,548
    Loans and Leases Charged-Off                 (  101,330)      (  137,609)
    Charged-Off Loan and Lease Recoveries             6,000               20
                                              --------------   --------------

    Balance - End of Period                       1,794,949        1,870,279
                                              ==============   ==============

     The gross  amount of  participation  loans  serviced  by State of  Franklin
     Savings  Bank was  $890,101 at June 30, 2004 and  $916,883 at December  31,
     2003.

     At June 30, 2004 the Company had non-accrual loans and leases totaling $2.6
     million  which  included  $121,000 in  impaired  loans  compared  with $3.2
     million  and  $121,000,  respectively,  at  December  31,  2003.  A loan is
     impaired when, based on current information and events, it is probable that
     the Company  will be unable to collect all  amounts  due  according  to the
     contractual  agreement.  The total  allowance for loan losses  allocated to
     impaired  loans was  $115,000 at June 30, 2004 and $66,000 at December  31,
     2003. No interest  income on impaired  loans was recognized for the periods
     ending June 30, 2004 and  December  31,  2003.  The Company had no loans or
     leases  90 days or more  past due and still  accruing  and no  restructured
     loans at June 30, 2004.


                                        9



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

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

                                                            For Capital
                                                             Adequacy
                                                             Purposes
                                                          And To Be Well
                                                        Capitalized Under
                                                         Prompt Corrective
                                         Actual          Action Provision
                                     ----------------    ----------------
In Thousands  (Reviewed)             Amount    Ratio     Amount    Ratio
---------------------------          ----------------    ----------------
As of June 30, 2004:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        24,273    12.07%    >=20,116   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        22,784    11.33%    >=12,069    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       22,784     7.40%    >=15,401    5.0%

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

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

  Tier 1 Capital
    (to Adjusted Total Assets)       21,923     7.48%    >=14,649    5.0%


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

                                                           For Capital
                                                            Adequacy
                                                            Purposes
                                                         And To Be Well
                                                        Capitalized Under
                                                        Prompt Corrective
                                          Actual        Action Provision
                                     -----------------  -----------------
In Thousands  (Reviewed)             Amount    Ratio    Amount    Ratio
---------------------------          -----------------  -----------------
As of June 30, 2004:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        34,091     16.91%   >=20,157    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        32,180     15.96%   >=12,094     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       32,180     10.40%   >=15,476     5.0%

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

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

  Tier 1 Capital
    (to Adjusted Total Assets)       31,351     10.63%   >=14,744     5.0%


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

     EMPLOYEE STOCK OWNERSHIP PLAN

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

     In November 2001, the ESOP loans were  consolidated  into a seven year term
     loan from the  Company in the amount of  $1,071,093  with a fixed  interest
     rate of 6.00%.  Note  payments  are  $15,218 per month for 83 months plus a
     final principal  payment of $24,092.  The note balance  outstanding at June
     30,  2004 was  $714,689.  In November  2001,  the  Company  also  granted a
     $300,000 line of credit to the ESOP for the purchase of  additional  shares
     of stock in the  Company as it becomes  available.  The  interest  rate for
     balances  outstanding  on the line of credit  is 6% with a five year  term.
     Interest  is  paid  monthly  with  principal  payments  made as  funds  are
     available.  At June 30, 2004, no balances were  outstanding for advances on
     the line of credit.

     Shares owned by the ESOP at June 30, 2004 totaled 175,488.  ESOP shares are
     maintained  in  a  suspense   account  until   released  and  allocated  to
     participants'  accounts. The release of shares from the suspense account is
     based on the  principal  paid in the  year in  proportion  to the  total of
     current year and remaining  outstanding debt. Allocation of released shares
     to  participants'  accounts is done as of December 31. Shares allocated and
     remaining in suspense were as follows:

                                                       June 30,     December 31,
                                                         2004           2003
                                                    -------------  -------------
      Number of Shares
        Released and Allocated since Inception           77,857         77,857
        Suspense                                         67,457         70,811

      Fair Value
        Released and Allocated since Inception        1,712,854      1,557,140
        Suspense                                      1,484,054      1,416,220

     The expense  recorded by the  Company is based on cash  contributed  to the
     ESOP during the year in amounts determined by the Board of Directors,  plus
     the excess of fair value of shares  released and allocated  over the ESOP's
     cost of  those  shares.  The  Company's  contributions  to the  ESOP are as
     follows:
                                                       June 30,     December 31,
                                                         2004           2003
                                                    -------------  -------------
      Compensation Expense                              222,000        408,370
      Contributions                                     222,000        408,370

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

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

     STOCK OPTION PLANS
<TABLE>
<CAPTION>
                                                                                            Weighted
                                                                                            Average
                                                                      Awarded               Exercise
                                                                        And                  Price
                                                                    Unexercised   Vested      Per
                                                                      Options     Options    Share
                                                 --------------------------------------------------
     <S>                                         <C>                   <C>       <C>         <C>
     Options Granted - Outside Directors         January 1, 2004        90,014    83,832     $12.47
                                                 During 2004             4,000     4,000     $20.00
     Options Granted - Management                January 1, 2004       238,211   182,828     $13.05
                                                 During 2004             3,553        --     $20.00
                                                                       -------   -------
     Options Outstanding - June 30, 2004                               335,778   270,660     $13.05
                                                                       =======   =======
</TABLE>
                                       11

<PAGE>


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

     Deposit balances are summarized as follows:

<TABLE>
<CAPTION>
                                             June 30, 2004               December 31, 2003
                                    -----------------------------  -----------------------------
                                      Rate    Amount      Percent    Rate      Amount    Percent
                                    ------- -----------  --------  ------- -----------  --------
<S>                                    <C>  <C>          <C>          <C>  <C>            <C>
     Passbook                          1.75  93,825,352     41.20     1.75  84,622,380     38.12
     Interest-Free Checking              --  12,949,160      5.69       --  12,114,590      5.46
     NOW                                .85  17,556,398      7.71     1.17  18,753,775      8.45
     Money Market Deposit              1.00  25,510,574     11.20     1.47  26,308,635     11.85
                                            -----------  --------          -----------  --------
                                            149,841,484     65.80          141,799,380     63.88
                                            -----------  --------          -----------  --------
     Fixed Term Certificate Accounts
      Balances $100,000 or greater     2.75  20,702,041      9.09     2.84  20,284,510      9.14
      Balances less than $100,000      2.58  57,184,616     25.11     2.66  59,908,596     26.98
                                            -----------  --------          -----------  --------
                                             77,886,657     34.20           80,193,106     36.12
                                            -----------  --------          -----------  --------
                                            227,728,141    100.00          221,992,486    100.00
                                            ===========  ========          ===========  ========
</TABLE>

The contractual  maturity of certificate  accounts at June 30, 2004 and December
31, 2003, is as follows:

           Period Ending June 30, 2004             Year Ending December 31, 2003
         --------------------------------          -----------------------------
            2004             22,538,547               2004            45,642,644
            2005             40,089,122               2005            21,464,822
            2006              6,711,066               2006             6,379,826
            2007              3,206,369               2007             2,937,998
            2008 and After    5,341,553               2008 and After   3,767,816
                             ----------                               ----------
                             77,886,657                               80,193,106
                             ==========                               ==========

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

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

         2004       17,469          2009                33,654
         2005       30,279          2010             8,034,555
         2006       31,090          2011            19,035,480
         2007       31,922          2012             5,036,430
         2008    3,032,776          2013 and after  10,911,814


Convertible fixed rate advances were $45,000,000 at June 30, 2004 and 35,000,000
at December 31,  2003.  The  convertible  fixed rate  advances  have an original
maturity of 10 years with an option  held by FHLB to convert to a variable  rate
tied to 3-month  LIBOR  beginning 1 to 3 years from the original  issue date. If
converted  to a  variable  rate the bank  maintains  the  option  to pay off the
advance or continue at the variable rate over the original  contractual maturity
of the advance.  CRA mortgage match advances are amortized over a 30-year period
and totaled $1,195,467 at June 30, 2004 and $1,210,071 at December 31, 2003. The
average  rate on FHLB  advances was 4.56% at June 30, 2004 and 4.85% at December
31, 2003.

The Savings Bank pledges as collateral for these borrowings  selected qualifying
mortgage  loans and  securities  (as defined)  under an agreement with the FHLB.
Loans  and  securities  pledged  at June  30,  2004  totaled  $66.9  million  in
residential mortgage loans and $11.6 million in securities. At December 31, 2003
there were  approximately  $54.3  million in  mortgage  loans and no  securities
pledged for FHLB borrowings.


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

The amortized cost and fair value of investment securities  held-to-maturity and
available-for-sale  at June 30, 2004, by contractual  maturity,  are as follows.
Expected maturities will differ from contractual  maturities because issuers may
have  the  right  to call  or  prepay  obligations  without  call or  prepayment
penalties.


                                       12


<PAGE>

<TABLE>
<CAPTION>
                                                             Gross       Gross       Estimated
                                             Amortized    Unrealized  Unrealized       Market
                                                Cost         Gains       Losses        Value
                                             ----------     -------   ----------   -----------
<S>                                          <C>            <C>        <C>          <C>
     Available-for-Sale:
          United States Government
            Agency Securities Maturing:
               Within one year                1,012,599       1,720           --     1,014,319

          Mortgage Backed Securities:
               After one year
                 but within five years          253,439          --        1,254       252,185
               After five years
                 but within ten years           937,927      15,206          102       953,031
               After ten years
                 but within fifteen years     1,008,147       8,765           --     1,016,912
               After 20 years                   196,545         573           --       197,118

              Municipal Securities Maturing:
               Within one year                  135,000       2,908           --       137,908
               After one year
                 but within five years        1,423,938      52,776           --     1,476,714
               After five years
                 but within ten years         5,426,670     199,164        1,506     5,624,328
               After ten years
                 but within fifteen years     9,704,883     345,980        2,393    10,048,470
               After fifteen years
                 but within twenty years      3,078,700      43,218       11,557     3,110,361
               After 20 years                 1,232,184          --       57,029     1,175,155

         Corporate Securities Maturing:
               Within one year                1,355,118       2,710           --     1,357,828
               After five years
                 but within ten years         4,447,838      33,431           --     4,481,269
               After ten years
                 but within fifteen years     2,100,000          --          246     2,099,754
               After twenty years             1,730,158      61,893           --     1,792,051

          Equity Securities
                Callable within one year     21,061,222          --    3,330,222    17,731,000
                Callable after one year
                  but within five years       4,414,150      40,000       71,496     4,382,654
                Callable after five years
                  but within ten years        1,000,000          --       20,000       980,000

          Other
               After 20 years                   318,155      18,021           --       336,176
                                             ----------   ---------    ---------   -----------
                  Total Available-for-Sale   60,836,673     826,365    3,495,805    58,167,233
                                             ==========   =========    =========   ===========

Held-to-Maturity:
          United States Government
            Agency Securities Maturing:
                After one year
                 but within five years        9,038,489          --      279,342     8,759,147
               After fifteen years
                 but within twenty years        262,608          --        3,414       259,194

          Mortgage Backed Securities:
                After one year
                 but within five years        2,815,581          --       16,654     2,798,927
               After five years
                 but within ten years        16,020,124          --      496,514    15,523,610
               After twenty years             5,730,542          59       91,002     5,639,599

          Municipal Securities Maturing:
                After one year
                 but within five years        1,274,487          --        8,284     1,266,203
               After ten years
                 but within fifteen years       429,980          --        5,523       424,457
               After fifteen years
                 but within twenty years        323,616          --       19,424       304,192
               After twenty years             2,515,898          --       80,625     2,435,273

    </TABLE>

                                       13


<PAGE>


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

          Corporate Securities Maturing:
               Within one year                1,141,136          --        3,147     1,137,989
               After one year
                 but within five years        1,149,854      27,670           --     1,177,524
               After five years
                 but within ten years         1,063,409      20,861        8,271     1,075,999
               After twenty years             5,248,397     183,466      108,418     5,323,445
                                             ----------     -------    ---------    ----------
                  Total Held-to-Maturity     47,014,121     232,056    1,120,618    46,125,559
                                             ==========     =======    =========    ==========
</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 June 30, 2004 and
     December 31, 2003 totaled $2,000,000 and $2,030,774, respectively.


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

     Earnings per share for six months ended June 30,  2004,  compared  with the
     same period in 2003, are as follows:

                                                           Six Months Ended
                                                               June 30,
                                                           2004        2003
                                                        ---------   ---------
Net Income                                              1,128,234   1,445,699

Average Basic Shares Outstanding                        1,396,486   1,384,778

Basic Earnings Per Share                                      .81        1.04
                                                        =========   =========

Net Income                                              1,128,234   1,445,699

Average Basic Shares Outstanding                        1,396,486   1,384,778
Dilutive Effect Due to Stock Options                      126,238      94,243
                                                        ---------   ---------
Average Shares Outstanding, as Adjusted                 1,522,724   1,479,021

Diluted Earnings Per Share                                    .74        0.98
                                                        =========   =========

                                       14

<PAGE>

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

     GENERAL
     -------

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

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

     At June 30,  2004,  assets of State of Franklin  Bancshares,  Inc.  totaled
     $308.7 million reflecting an increase of $16.6 million or 6% since December
     31, 2003. The growth in assets has been funded  primarily by a $5.7 million
     increase in deposits and a $10 million increase in FHLB advances.

     LOANS
     -----

     Loans  outstanding  totaled  $154.4  million at June 30, 2004 compared with
     $151.1  million at December 31, 2003.  Commercial and  construction  loans,
     first  mortgage  loans,  and credit line advances  increased  $2.6 million,
     $89,000, and $382,000, respectively. Consumer loans decreased $231,000. The
     loan portfolio mix at June 30, 2004 consists of 33% residential  mortgages,
     43% commercial, 14% real estate construction, and 10% consumer loans.

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

     Investment  securities  totaled  $105.2  million  at  June  30,  2004.  The
     investment  portfolio  at quarter end  consisted  of $10.3  million in debt
     securities issued by the U. S Government or Federal Agencies, $27.0 million
     in mortgage backed securities, $26.1 million in securities issued by state,
     county, or  municipalities,  $18.3 million in corporate  securities,  $23.1
     million in  preferred  stock  issued by Federal  Agencies,  and $336,000 in
     other equity securities.

     At June 30, 2004,  securities  categorized  as  available-for-sale  totaled
     $58.2 million while the  held-to-maturity  securities totaled $47.0 million
     compared  to $63.4  million  in  available-for-sale  and $34.0  million  in
     held-to-maturity   at  December   31,   2003.   At  June  30,   2004,   the
     available-for-sale  portfolio had net unrealized losses of $2,669,000 while
     our held-to-maturity securities had $889,000 in net unrealized losses.

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

     At June 30, 2004 the Company had  nonaccrual  loans  totaling  $2.6 million
     compared  with $3.2 million at December 31, 2003.  The reserve for loan and
     lease losses was  $1,795,000 at June 30, 2004, or 1.17% of loans and leases
     outstanding,  net of unearned  income and loans held for sale,  compared to
     $1,870,000 or 1.24% at December 31, 2003. Management believes the allowance
     for loan losses is adequate to provide for potential loan losses.

     DEPOSITS
     --------

     Total deposits at June 30, 2004 of $227.7 million, reflected an increase of
     $5.7  million or a 3%  increase  from $123  million at December  31,  2003.
     Non-interest  bearing  demand  deposits  totaled  $12.9 million at June 30,
     2004,  an increase of $835,000  from  December 31, 2003.  Interest  bearing
     deposits increased $4.9 million to $214.8 million at June 30, 2004.

     CAPITAL
     -------

     Tier 1 capital for the Savings Bank at June 30, 2004 was $22.8 million.  At
     June  30,  2004,  all  capital  ratios  were in  excess  of the  regulatory
     minimums,  with the Savings Bank's Tier 1, total  risk-based,  and leverage
     ratios of 11.33%, 12.07% and 7.40%, respectively.

     Tier 1 capital for the Company at June 30,  2004,  was $32.2  million  with
     Tier 1,  total  risk-based,  and  leverage  ratios of 15.96%,  16.91%,  and
     10.40%, respectively.

                                       15
<PAGE>

     LIQUIDITY
     ---------

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

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

     The Company had net income of $576,000 for the three months ending June 30,
     2004, compared with $614,000 for the same period last year,  resulting in a
     decrease of 6%. Return on average assets was .75% and the return on average
     equity was 9.41% for the three months ended June 30,  2004,  compared  with
     .89% and 10.52%,  respectively,  for the same  period in 2003.  For the six
     months  ending  June 30,  2004,  net income was  $1,128,000  compared  with
     $1,446,000  for the same  period  ending June 30,  2003.  Return on average
     assets and average equity were .75% and 9.17%, respectively,  compared with
     1.07% and 12.61% for the six month period ended June 30, 2003.  For the six
     months ended June 30, 2004,  net income per diluted share was $.74 compared
     to earnings per share of $.98 for the same period in 2003.

     Noninterest income decreased $267,000,  or 28%, during the six months ended
     June  30,  2004,  compared  to the same  period  last  year as a result  of
     declines  in  gains on  loans  sold,  realized  gains  on  securities,  and
     insurance  commissions.   Contributing  significantly  to  the  decline  in
     noninterest income were decreases in net gains on loans sold which declined
     from the prior  year due to a  reduction  in the number of  existing  homes
     being refinanced.

     Noninterest expense was $3,029,000 for the six months ending June 30, 2004,
     an  increase  of  $469,000,  or 18% over the 2003  period,  resulting  from
     increases  in  compensation  and  related  benefits,   occupancy   expense,
     furniture and equipment expense,  advertising,  data processing,  and other
     operating expenses.

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

     Interest  income and  interest  expense  both  decreased  from 2003 to 2004
     primarily  resulting from assets and liabilities  repricing at lower rates.
     Net interest  income of  $3,837,000  for the six months ended June 30, 2004
     reflects a decrease of $93,000 or 2% under the same  period last year.  For
     the six months ending June 30, 2004, average earning assets increased $30.1
     million or 12% while average interest bearing  liabilities  increased $27.6
     million,  also 12%,  compared  with the same  period in 2003.  The  taxable
     equivalent  yield on earning  assets  declined 67 basis points to 5.19% for
     the first six months of 2004  compared  with the same  period in 2003 while
     the cost on interest bearing liabilities declined 35 basis points to 2.49%.
     Consequently,  the taxable  equivalent net interest margin based on average
     earning  assets  decreased to 2.91% for the six months ending June 30, 2004
     compared with 3.29% for the same period in 2003.

                                       16
<PAGE>


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

     During the six months ended June 30, 2004,  the provision for possible loan
     losses was $20,000  compared  with  $291,000 for the same period last year.
     There were $95,000 in loan or lease  charge-offs  net of recoveries for the
     six  months  ended  June 30,  2004,  compared  to  $3,000  in loan or lease
     charge-offs during the same period in 2003. The allowance for possible loan
     losses   represented   1.17%  of  total  loans,   net  of  mortgage   loans
     held-for-sale,  at June 30,  2004,  compared  to  1.20%  at June 30,  2003.
     Management  considers the allowance for loan losses to be adequate to cover
     losses inherent in the loan portfolio.

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

     For the six months ended June 30, 2004, the provision for federal and state
     income taxes was $334,000,  a decrease of $240,000 from 2003.  The decrease
     is due to a decline in taxable income compared to the same period in 2003.

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

     The Company's  noninterest  income was $674,000 during the six months ended
     June 30,  2004,  a decrease  of $267,000  or 28% from the  comparable  2003
     period.  During  2004,  other fees and service  charges,  real estate sales
     commissions,  and net rental income increased $5,000, $22,000, and $10,000,
     respectively.  Net gain on loans  sold  declined  $288,000,  and  insurance
     commission income declined $15,000.

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

     Noninterest expense totaled $3,029,000 for the six month period ending June
     30, 2004,  an increase of $469,000,  or 18%,  over the same period in 2003.
     The  increase was the result of increases  in  compensation  and  benefits,
     occupancy  expense,  furniture and  equipment  expense,  advertising,  data
     processing,  and other  operating  expenses of $104,000,  $3,000,  $90,000,
     $64,000, $62,000, and $146,000, respectively.

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.






                                       17

<PAGE>

PART II  -  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None

ITEM 2.  CHANGES IN SECURITIES

         None

ITEM 3.  DEFAULT UPON SENIOR SECURITIES

         None

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

       At the Annual Meeting on May 24, 2004, the shareholders voted on the
following proposals with the results as indicated:

     1.  Elected  four of its current  directors to continue in office until the
     2007  annual  meeting  of  shareholders.   Current   directors  elected  to
     three-year terms were as follows:

                                                       FOR WITHHOLD AUTHORITY
                                                    ----------------------------
         Charles E. Allen, Jr.                      1,018,737             1,900
         Vance W. Cheek                             1,015,337             5,300
         Stephen K. Gross                           1,018,737             1,900
         Verrill M. Norwood, Jr.                    1,017,237             3,400

       Directors continuing to serve include:

         Charles E. Allen, Sr., M.D.  Alan R. Hubbard    Richard S. Venable
         Kenneth E. Cutshall, M.D.    Donald R. Jeanes   Henry J. Williams, M.D.
         Randal R. Greene             Cameron E. Perry

     2. Ratified the appointment of Baylor & Backus as the Company's independent
     accountants and auditors for 2004 as follows:

                 FOR           AGAINST       ABSTAIN         BROKER NON-VOTES
           ---------------------------------------------------------------------
               1,015,062        3,475         2,100                  0

ITEM 5.  OTHER INFORMATION

         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

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

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

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

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

b)   The Company  did not file any reports on Form 8-K during the quarter  ended
     June 30, 2004

                                       18


<PAGE>

                                   SIGNATURES


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





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





    August 11, 2004                          /s/ Randal R. Greene
---------------------------                  -----------------------------------
         (Date)                                  Randal R. Greene, President





    August 11, 2004                          /s/ Charles E. Allen, Jr.
---------------------------                  -----------------------------------
         (Date)                                  Charles E. Allen, Jr.,
                                                 Chairman of the Board and
                                                 Chief Executive Officer
                                                 (Principal Executive, Financial
                                                 and Accounting Officer)
























                                     19