<PAGE>   1
                    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, 1999
                                               ------------------

                                       OR
                                       --

    [ ]         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                               37604
----------------------------------------  -------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)


                                 (423) 232-4400
              ----------------------------------------------------
                (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 [ ]


                                   1,190,427
   (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF SEPTEMBER 30, 1999)


           TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):


                               YES [ ]     NO [X]
<PAGE>   2

                       STATE OF FRANKLIN BANCSHARES, INC

                                     INDEX



<TABLE>
<CAPTION>
PART I.     FINANCIAL INFORMATION

                                                                                                 PAGE
                                                                                                 ----
<S>      <C>                                                                                     <C>
         ITEM 1.    FINANCIAL STATEMENTS

                    CONSOLIDATED BALANCE SHEETS                                                     3
                           SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998

                    CONSOLIDATED STATEMENTS OF INCOME                                             4-5
                           THREE MONTHS AND NINE MONTHS ENDED
                           SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)

                    CONSOLIDATED STATEMENTS OF CASH FLOWS                                           6
                           NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)

                    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                 7
                           THREE MONTHS AND NINE MONTHS ENDED
                           SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                          8

         ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS                                               9



PART II.   OTHER INFORMATION


         ITEM 1.    LEGAL PROCEEDINGS                                                              13

         ITEM 2.    CHANGES IN SECURITIES                                                          13

         ITEM 3.    DEFAULT UPON SENIOR SECURITIES                                                 13

         ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                            13

         ITEM 5.    OTHER INFORMATION                                                              13

         ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K                                               13
</TABLE>


                                       2
<PAGE>   3

PART I  - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                       STATE OF FRANKLIN BANCSHARES, INC.
                    Consolidated Balance Sheets - Unaudited



<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,        DECEMBER 31,
                      ASSETS                                           1999                 1998
----------------------------------------------------------------------------------------------------

<S>                                                               <C>                    <C>
Cash and Due from Banks                                           $   3,381,044            2,507,173
Federal Funds Sold                                                    1,364,000            6,421,000
Short-Term Interest Bearing Deposits                                         --            5,000,000
Investments - HTM                                                    12,988,280                    0
Investments - AFS                                                    21,345,240           12,248,572
Loans Held for Sale                                                     258,074            1,627,400
Loans and Leases Receivable                                         106,576,081           85,228,897
   Less: Allowance for Loan Loss                                       (818,380)            (630,324)
----------------------------------------------------------------------------------------------------
   Loans and Leases Receivable, Net                                 105,757,701           84,598,573
----------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net                                      1,137,773              685,963
Land, Buildings & Equip at Cost Less Accum Depr
   of $535,873 in 1999 and $347,134 in 1998                           4,043,649            4,117,351
Prepaid Expense and Accounts Receivable                                  97,381               48,218
Investment in Service Bureau at Cost                                     15,000               15,000
Deferred Tax Assets                                                     501,523              186,946
FHLB Stock                                                            1,393,200              471,200
Cash due from ESOP                                                           --              108,286
----------------------------------------------------------------------------------------------------
     TOTAL ASSETS                                                 $ 152,282,865          118,035,681
----------------------------------------------------------------------------------------------------
             LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------
LIABILITIES:
Interest-free Checking                                            $   7,425,521            5,539,590
Interest-bearing Deposits                                           122,609,322           90,824,486
Advances by borrowers for Taxes and Insurance                           293,155               98,784
Accrued Interest on Deposits                                             85,121              103,769
Accounts Payable and Accrued Expenses                                   370,438              189,379
FHLB Advances                                                         9,048,000            9,000,000
Deferred Gain on REO                                                     21,449               21,449
Notes Payable                                                           639,782              687,925
----------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                          $ 140,492,788          106,465,382
----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:

Common Stock, $1.00 Par Value                                         1,190,427            1,180,152
Common Stock Subscribed                                                      --                6,996
Paid-in Capital                                                      10,935,571           10,905,359
Accumulated Other Comprehensive Income                                 (446,254)              39,820
Retained Earnings                                                       750,115              102,792
Unearned Compensation - ESOP                                           (639,782)            (664,820)
----------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                 $  11,790,077           11,570,299
----------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $ 152,282,865          118,035,681
----------------------------------------------------------------------------------------------------
</TABLE>


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


                                       3
<PAGE>   4

                       STATE OF FRANKLIN BANCSHARES, INC.
                 Consolidated Statements of Income - Unaudited


<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED SEPTEMBER 30,
                                                                               --------------------------------
INTEREST INCOME:                                                                   1999                  1998
                                                                               -----------            ---------
<S>                                                                            <C>                    <C>
Interest and Fees on Loans                                                     $ 2,147,155            1,563,631
Other Interest Income                                                              596,621              523,739
---------------------------------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                                     2,743,776            2,087,370
---------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits                                                             1,487,732            1,187,979
Other Interest Expense                                                             123,182              123,028
---------------------------------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                                    1,610,914            1,311,007
---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS                               1,132,862              776,363
PROVISION FOR LOAN LOSSES                                                          (70,361)             (85,655)
---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS                                1,062,501              690,708
---------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges                                                      71,424               43,005
Net Gain on Loans Sold                                                               9,199                7,443
Net Gain on Sale and Maturity of Securities                                             --                   --
Insurance Commission Income                                                          6,354                8,472
Rental Income, Net                                                                  29,838               25,828
Other                                                                                   --                2,440
---------------------------------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                                          116,815               87,188
---------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits                                                  326,467              317,109
Occupancy Expenses                                                                  60,549               59,543
Furniture and Equipment Expense                                                     62,286               47,041
Advertising                                                                         35,393               25,844
Data Processing Expense                                                             87,492               56,122
Other                                                                              193,778              154,990
---------------------------------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                                        765,965              660,649
---------------------------------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                                                    413,351              117,247
PROVISION FOR INCOME TAXES                                                        (160,925)             (51,817)
---------------------------------------------------------------------------------------------------------------
       NET INCOME                                                              $   252,426               65,430
---------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
     BASIC                                                                     $      0.22                 0.06
     DILUTED                                                                          0.22                 0.06
---------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
     BASIC                                                                       1,131,803            1,122,506
     DILUTED                                                                     1,138,786            1,122,506
---------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                       4
<PAGE>   5

                       STATE OF FRANKLIN BANCSHARES, INC.
                 Consolidated Statements of Income - Unaudited


<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED SEPTEMBER 30,
                                                                                -------------------------------
INTEREST INCOME:                                                                   1999                  1998
                                                                                ----------            ---------
<S>                                                                            <C>                    <C>
Interest and Fees on Loans                                                     $ 5,877,416            4,049,605
Other Interest Income                                                            1,584,338            1,384,578
---------------------------------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                                     7,461,754            5,434,183
---------------------------------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                                             4,074,962            3,256,088
Other Interest Expense                                                             367,865              165,046
---------------------------------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                                    4,442,827            3,421,134
---------------------------------------------------------------------------------------------------------------

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS                               3,018,927            2,013,049
PROVISION FOR LOAN LOSSES                                                         (189,507)            (213,034)
---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS                                2,829,420            1,800,015
---------------------------------------------------------------------------------------------------------------

OTHER INCOME:

Other Fees and Service Charges                                                     176,869              122,965
Net Gain on Loans Sold                                                              95,098               41,881
Net Gain on Sale and Maturity of Securities                                         12,724               38,769
Insurance Commission Income                                                         32,796               26,769
Rental Income, Net                                                                  88,992               71,633
Other                                                                                   --                7,747

---------------------------------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                                          406,479              309,764
---------------------------------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                                                  940,952              799,617
Occupancy Expenses                                                                 187,481              170,704
Furniture and Equipment Expense                                                    192,323              134,353
Advertising                                                                         99,610               78,978
Data Processing Expense                                                            241,302              154,105
Other                                                                              568,233              430,142
---------------------------------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                                      2,229,901            1,767,899
---------------------------------------------------------------------------------------------------------------

       INCOME BEFORE INCOME TAX                                                  1,005,998              341,880
PROVISION FOR INCOME TAXES                                                        (358,793)            (119,569)
---------------------------------------------------------------------------------------------------------------
       NET INCOME                                                              $   647,205              222,311
---------------------------------------------------------------------------------------------------------------

EARNINGS PER SHARE:
     BASIC                                                                     $      0.58                 0.20
     DILUTED                                                                          0.57                 0.20
---------------------------------------------------------------------------------------------------------------

WEIGHTED AVERAGE SHARES OUTSTANDING:
     BASIC                                                                       1,124,931            1,122,506
     DILUTED                                                                     1,129,607            1,122,506
---------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                       5
<PAGE>   6

                       STATE OF FRANKLIN BANCSHARES, INC.
               Consolidated Statements of Cash Flows - Unaudited


<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED SEPTEMBER 30,
                                                                                -------------------------------
                                                                                   1999                  1998
                                                                                ----------             --------
<S>                                                                          <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net Income (Loss)                                                       $     647,205              222,311
     Items Not Affecting Cash:
         Depreciation                                                              188,739              144,846
         (Increase) in Accrued Interest                                           (451,811)            (368,072)
         Deferred Income Taxes (Benefit)                                            84,692               41,584
         Provisions for Loan Losses                                                189,507              213,034
         (Increase) Decrease in Prepaid Expenses and Accounts Receivable           (49,163)              32,156
         (Decrease) in Interest Payable                                            (18,648)              59,336
         Increase in Accounts Payable and Accrued Expenses                         181,060               29,279
         (Decrease) in Deferred Loan Fees, Net                                       7,344               15,489
         (Gain) on Sale of Investments                                                  --              (38,770)
         Discount Accretion                                                         (3,033)              (1,951)
         Increase in Deferred Gain on Sale of REO                                       --               21,448
         Earned ESOP Shares                                                         48,143                   --
         FHLB Stock Dividends                                                      (51,300)              (8,300)
         Net (Increase) Decrease in Loans Held for Sale                          1,369,326              123,700
---------------------------------------------------------------------------------------------------------------
            NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                     2,142,061              486,090
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of Held-to-Maturity Investments                                  (16,536,456)                  --
     Purchase of Available-for-Sale Investments                                (12,986,406)         (19,855,339)
     Proceeds from Maturities of Held-to-Maturity Investments                           --           11,606,525
     Proceeds from Sale of Available-for-Sale Investments                            9,662            6,151,155
     Proceeds from Maturities of Available-for-Sale Investments                  6,595,000                   --
     Principal payments on Mortgage Backed Securities - AFS                         35,965              108,610
     (Increase) Decrease in Federal Funds Sold                                   5,057,000            4,495,000
     (Increase) Decrease in Short-Term Interest Bearing Deposits                 5,000,000           (5,000,000)
     Increase in Loans Receivable, Net                                         (21,355,702)         (28,633,125)
     Purchases of Premises and Equipment                                          (115,036)            (702,223)
     Purchases of Federal Home Loan Bank Stock                                    (870,700)            (454,800)
---------------------------------------------------------------------------------------------------------------
         NET CASH (USED) BY INVESTING ACTIVITIES                               (35,166,673)         (32,284,197)
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Net Increase in Deposits                                                   33,670,766           23,294,406
     Net Increase in Advances by Borrowers for Taxes and Insurance                 194,371              132,191
     Issuance of Common Stock, Net                                                  33,491               55,276
     Proceeds from Loan                                                                 --              700,000
     Repayment of Debt                                                             (48,143)                  --
     Organization Costs                                                                 --              (10,407)
     Proceeds from FHLB Advances                                                    48,000            9,000,000
---------------------------------------------------------------------------------------------------------------
         NET CASH PROVIDED BY FINANCING ACTIVITIES                              33,898,485           33,171,466
---------------------------------------------------------------------------------------------------------------
            NET INCREASE (DECREASE) IN CASH                                        873,872            1,373,359
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD                                   2,507,173            2,321,800
---------------------------------------------------------------------------------------------------------------
            CASH AND DUE FROM BANKS AT END OF PERIOD                         $   3,381,044            3,695,159
---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized Gain on Securities Available-For-Sale,
  Net of Deferred Tax Liability                                              $    (486,074)              60,170
---------------------------------------------------------------------------------------------------------------
REO Sold in Exchange for Loan Receivable                                     $          --              245,681
---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash Paid During the Period for:
         Income Taxes                                                        $     222,710                   --
         Interest                                                            $   4,461,475            3,361,797
---------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                       6
<PAGE>   7

                       STATE OF FRANKLIN BANCSHARES, INC.
          Consolidated Statements of Comprehensive Income - Unaudited


<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED SEPTEMBER 30,
                                                                               --------------------------------
                                                                                   1999                   1998
                                                                               -----------              -------
<S>                                                                            <C>                      <C>
NET INCOME                                                                     $   252,426               65,430
---------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, BEFORE TAX:

     UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE:

       UNREALIZED HOLDINGS GAIN (LOSS) ARISING DURING THE PERIOD                  (153,379)             108,184

       RECLASSIFICATION ADJUSTMENT FOR LOSSES (GAINS) INCLUDED
            IN NET INCOME                                                               --                    1
---------------------------------------------------------------------------------------------------------------
            OTHER COMPREHENSIVE INCOME (LOSS)                                     (153,379)             108,185

INCOME TAXES (BENEFIT) RELATED TO OTHER
  COMPREHENSIVE INCOME                                                             (52,149)              36,783
---------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS)                                              $   151,196              136,832
---------------------------------------------------------------------------------------------------------------



<CAPTION>
                                                                                NINE MONTHS ENDED SEPTEMBER 30,
                                                                               --------------------------------
                                                                                   1999                   1998
                                                                               -----------              -------
<S>                                                                            <C>                      <C>
NET INCOME                                                                     $   647,205              222,311
---------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, BEFORE TAX:

     UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE:

       UNREALIZED HOLDINGS GAIN (LOSS) ARISING DURING THE PERIOD                  (723,751)              52,709

       RECLASSIFICATION ADJUSTMENT FOR LOSSES (GAINS) INCLUDED
            IN NET INCOME                                                          (12,724)              38,458
---------------------------------------------------------------------------------------------------------------
            OTHER COMPREHENSIVE INCOME (LOSS)                                     (736,475)              91,167

INCOME TAXES (BENEFIT) RELATED TO OTHER
  COMPREHENSIVE INCOME                                                            (250,402)              30,997
---------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS)                                              $   161,132              282,481
---------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                       7
<PAGE>   8

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. The stockholders
           of the Savings Bank exchanged their shares for the shares of the
           Company, whereby the Savings Bank became the Company's wholly owned
           subsidiary. State of Franklin Leasing Corporation was incorporated
           under the laws of the state of Tennessee for the purpose of lease
           financing. The Leasing Corp is a wholly owned subsidiary of the
           Company. John Sevier Title Services, Inc. is the wholly owned
           subsidiary of the Savings Bank.


NOTE 2     BASIS OF PREPARATION

           The accompanying unaudited 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 in
           accordance with the instructions for Form 10-Q SB. Accordingly, they
           do not include all disclosures necessary for a complete presentation
           of the consolidated statements of financial condition, income, cash
           flows, and comprehensive income 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
           comprehensive income for the nine months ended September 30, 1999,
           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, 1998.


NOTE 3     RECLASSIFICATIONS

           In instances where required, amounts reported in prior year's
           financial statements included herein have been reclassified to put
           them on a comparable basis to the amounts reported in the December
           31, 1998 consolidated financial statements.


NOTE 4     EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)

           At September 30, 1999, the ESOP had 78,593 shares of which
           approximately 16,054 shares were released and allocated, 4,376
           shares were considered committed to be released and 58,163 shares
           were unallocated. For the nine months ended September 30, 1999,
           compensation related to the ESOP of approximately $93,800 was
           expensed. Unallocated ESOP shares are not considered outstanding for
           the earnings per share calculation.


NOTE   5   COST TO ISSUE STOCK

           There were no miscellaneous organization expenses of the Company
           netted against paid-in capital for the nine month period ended
           September 30, 1999. During 1998, $11,355 which was the cost of
           issuing additional stock was netted against paid-in capital.


                                       8
<PAGE>   9

NOTE 6     LOANS RECEIVABLE

           Loans receivable at September 30, 1999 and December 31, 1998,
consist of the following:

<TABLE>
<CAPTION>
                                                                        1999                 1998
                                                                    -----------          ----------

<S>                                                                 <C>                  <C>
              First Mortgage Loans                                   41,757,195          35,195,869
              Construction Loans                                     25,244,269          22,024,861
              Consumer Loans                                          9,937,877           7,726,136
              Participation Loans, Net                                  533,676             863,162
              Commercial Loans                                       35,741,345          26,603,529
              Savings Account Loans                                     309,665             545,011
              Credit Line Advances                                      335,031             396,618
              Lease Finance                                             636,557             120,999
                                                                    -----------          ----------

                Gross Loans Receivable                              114,495,616          93,476,185
                                                                    -----------          ----------

              Less:
                Undisbursed Portion of Loans in Process              (7,844,629)         (8,179,727)
                Net Deferred Loan Origination Fees                      (74,905)            (67,561)
                Accumulated General Loan Loss Allowance                (818,380)           (630,324)
                                                                    -----------          ----------

                                                                     (8,737,915)         (8,877,612)
                                                                    -----------          ----------

              Loans Receivable, Net                                 105,757,701          84,598,573
                                                                    ===========          ==========
</TABLE>


           An analysis of the allowance for loan losses at September 30, 1999
and December 31, 1998 is as follows:

<TABLE>
<CAPTION>
                                                                       1999                 1998
                                                                    -----------          ----------

                <S>                                                 <C>                  <C>
                Balance - Beginning of Period                           630,324             355,474
                Provision for Losses                                    189,507             275,127
                Net Charge-Offs                                          (1,450)               (277)
                                                                      ---------            --------

                Balance - End of Period                                 818,380             630,324
                                                                      =========            ========
</TABLE>




ITEM NO. 2 MANAGEMENT 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 (the "Bank") and State of
         Franklin Leasing Corporation (the "Leasing Company") represents
         virtually all of the assets of State of Franklin Bancshares, Inc. (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.


                                       9
<PAGE>   10

         BALANCE SHEET REVIEW

         At September 30, 1999, assets of State of Franklin Bancshares, Inc.
         totaled $152.3 million reflecting an increased $34.2 million or 29%
         since December 31, 1998. The growth in assets has been funded
         primarily by a $33.7 million increase in deposits.

         LOANS

         Loans outstanding totaled $106.6 million at September 30, 1999. This
         represented an increase of 25% from the December 31, 1998 outstanding
         loans of $85.2 million.

         Commercial loans increased $9.1 million at September 30, 1999, an
         increase of 34.4% from $26.6 million at December 31, 1998. Real estate
         construction lending totaled $25.2 million compared with $22 million
         at December 31, 1998, reflecting an increase of $3.2 million or 14.6%.
         Consumer loans of $9.9 million at September 30, 1999 increased 28.6%
         from $7.7 million at December 31, 1998. During the first nine months
         of 1999, first mortgage residential loans increased $6.6 million or
         18.6% to $41.8 million at September 30, 1999. The loan portfolio mix
         at September 30, 1999 consists of 36% residential mortgages, 31%
         commercial, 22% real estate construction, and 9% consumer loans.

         INVESTMENT SECURITIES

         Investment securities totaled $34.3 million at September 30, 1999. The
         majority of the holdings are backed by U. S. Government or Federal
         Agency guarantees limiting the credit risk associated with these
         securities. At September 30, 1999, approximately $21.3 million of
         investment securities were held as available-for-sale compared to
         $12.2 million at December 31, 1998. This $9.1 million increase, in
         addition to a $13 million increase in investments held-to-maturity,
         was funded in part from a $10.1 million reduction in fed funds and
         short-term interest bearing deposits.

         NON-PERFORMING ASSETS

         There were no non-performing assets or nonaccrual loans at September
         30, 1999 and December 31, 1998. The allowance for possible loan losses
         was $818,000 at September 30, 1999 compared with $630,000 at year end
         1998. Management believes the allowance for possible loan losses is
         adequate to provide for potential loan losses.

         DEPOSITS

         Total deposits at September 30, 1999 of $130 million, represented an
         increase of $33.6 million or a 34.9% increase from $96.4 million at
         December 31, 1998. Non-interest bearing demand deposits totaled $7.4
         million at September 30, 1999, an increase of $1.9 million from
         December 31, 1998. Interest bearing deposits increased $31.8 million
         to $122.6 million at September 30, 1999.

         CAPITAL

         Equity capital at September 30, 1999 was $11.8 million. At September
         30, 1999, all capital ratios were in excess of the regulatory
         minimums, with the Bank's Tier 1, total risk-based, and leverage
         ratios of 12.50%, 13.64% and 8.02%, 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 a line of credit with the Federal
         Home Loan Bank of Cincinnati totaling $22 million at September 30,
         1999.


                                      10
<PAGE>   11

         On October 4, 1999, the Company filed a registration statement on Form
         SB-1 with the SEC for the purpose of offering up to 555,555 shares of
         its common stock at a per share price of $13.50. This offering will
         begin only after the SEC has declared the registration statement
         effective.


         EARNINGS REVIEW

         The Company had net income of $252,000 for the three months ending
         September 30, 1999, compared with $65,430 for the same period last
         year, resulting in an increase of 286%. Net income of the nine months
         ended September 30, 1999 was $647,000, an increase of $425,000 or 191%
         over the six months ended September 30, 1998 total net income of
         $222,000. Net income per diluted share was $0.57 compared to earnings
         per share of $0.20 in 1998. Return on average assets was .63% and the
         return on average equity was 7.46% for the nine month period ended
         September 30, 1999.

         Noninterest income increased $97,000, or 31.2%, with other fees and
         service charges, net gains on loans sold and insurance commissions
         responsible for most of the increase over the nine months ended
         September 30, 1998. Noninterest expense was $2.2 million for the 1999
         period, an increase of 26.1% over the 1998 period, primarily resulting
         from increased salaries and benefits, data processing, and furniture
         and equipment expense.

         NET INTEREST INCOME

         Interest income and interest expense both increased from 1998 to 1999
         resulting primarily from the increases in both earning assets and
         interest bearing liabilities. Net interest income of $1.1 million for
         the three months ending September 30, 1999 reflects an increase of
         $356,000 or 45.9% over the same period a year ago. Net interest income
         of $3 million for the nine months ended September 30, 1999 was up $1
         million or 50% over the same period in 1998. For the nine months
         ending September 30, 1999, average earning assets increased $37.5
         million or 40% while average interest bearing liabilities increased
         $30.1 million or 34% compared with the same period in 1998. Average
         earning asset yield declined 23 basis points to 7.63% while the cost
         on interest bearing liabilities declined 18 basis points.
         Consequently, the net interest margin based on average earning assets
         increased to 3.09% for the nine months ending September 30, 1999
         compared with 2.95% for the same period in 1998.

         PROVISION FOR LOAN LOSSES

         During the nine months ended September 30, 1999, the provision for
         possible loan losses was $190,000 compared with $213,000 for the same
         period last year. Loan charge-offs for the nine months ended September
         30, 1999, were $1,000 compared with no charge-offs in 1998. The
         allowance for possible loan losses represented .77% of total loans,
         net of mortgage loans held-for-sale, at September 30, 1999, compared
         to .74% at September 30, 1998. 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, 1999, the provision for
         federal and state income taxes was $359,000, an increase of $239,000
         from 1998, primarily due to the increase in income before income
         taxes.

         NONINTEREST INCOME

         The Company's noninterest income was $406,000 during the nine months
         ended September 30, 1999, an increase of $97,000 or 31.2% over the
         comparable 1998 period. The increase was attributable to increases in
         other fees and service charges, net gains on loans sold, insurance
         commissions, and rental income of $54,000, $53,000, $6,000, and
         $17,000, respectively, which were offset by decreases in net gain on
         sale and maturity of securities and other income of $26,000 and
         $8,000, respectively.

         NONINTEREST EXPENSE

         Noninterest expense totaled $766,000 for the three month period ending
         September 30, 1999, an increase of $105,000 or


                                      11
<PAGE>   12

         16%. For the nine month period ending September 30, 1999, noninterest
         expense was up $462,000 or 26% over the same period in 1998. The
         increases were a result primarily of growth in both the loan and
         deposit functions of the organization. Compensation and related
         benefits, data processing expense, and other operating expenses, which
         include postage, printing and supplies, and telephone expense, reflect
         the growth in the customer base and the general increased size of the
         organization.


         YEAR 2000 COMPLIANCE

         The Year 2000 poses challenges to the banking industry. Many experts
         believe that even the most prepared organizations may encounter some
         implementation problems. The federal banking agencies are concerned
         that financial institutions avoid major disruptions to service and
         operations. All banks are required to have an action plan to address
         Year 2000 issues which must include an indication of management
         awareness of the problems and the commitment to solutions;
         identification of external risks; and operational issues that are
         relevant to a bank's Year 2000 planning.

         The Federal Financial Institutions Examination Council ("FFIEC") has
         issued guidelines and target time frames to accomplish critical
         actions concerning Year 2000 compliance:

         --   By September 30, 1997, all banks should have identified affected
              applications and databases. Mission critical applications should
              be identified and an action plan set for Year 2000 work.

         --   By December 31, 1997, code enhancements and revisions, hardware
              upgrades, and other associated changes should be largely
              completed by all banks. In addition, for mission critical
              applications, programming changes should be largely completed and
              testing should be well underway.

         --   Between January 1, 1999 and December 31, 1999, banks should be
              testing and implementing their Year 2000 conversion programs.

         External factors which may adversely affect the Company include
         reliance on vendors, such as third-party data processing services and
         software and hardware vendors; electronic data-sensitive exchange
         among other financial institutions which may not be Year 2000
         compliant; its corporate customers and other debtors.

         We have been assessing our state of readiness by evaluating our
         information technology ("IT") and non-IT systems. IT systems commonly
         include data processing, accounting and telephone systems. With
         respect to our IT systems, we estimate that our Year 2000
         identification, assessment and remediation efforts are substantially
         complete. During 1999, further testing will be carried out in order to
         ensure that all systems are working properly. We have assessed our
         Year 2000 status in regard to non-IT systems and have determined that
         no material risk exists.

         We have communicated with our significant vendors in order to
         determine the extent to which interfaces with such entities are
         vulnerable to Year 2000 issues and whether the products and services
         purchased from such entities are Year 2000 compliant. We have received
         either verbal or written assurance from these vendors that they expect
         to address all their significant Year 2000 issues on a timely basis.
         With respect to significant borrowers and depositors, we do not
         anticipate any material Year 2000 issues.

         We require all commercial loan applicants to complete a Year 2000
         questionnaire prior to our approval of loan requests. We believe the
         most reasonable likely worst-case Year 2000 scenario would be a
         failure of our data processing, accounting and telephone systems. We
         have contingency plans in place in the event these systems fail. Our
         employees have engaged in practice drills which include manual
         procedures to complete most system functions.

         The Company anticipates total expenses relating to Year 2000 issues
         not to exceed $25,000 with approximately $4,000 remaining for staff
         training and customer awareness.


                                      12
<PAGE>   13

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)     27  Financial Data Schedule (for SEC use only)
         b)     The Company did not file any reports on Form 8-K during the
                quarter ended September 30, 1999


                                      13
<PAGE>   14

                                   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 15, 1999                      /s/ RANDAL R. GREENE
-----------------       ------------------------------------------------------
     (Date)                   Randal R. Greene, President and Chief
                                           Executive Officer
                                    (Principal Executive Officer)




November 15, 1999                    /s/ CHARLES E. ALLEN, JR.
-----------------      -------------------------------------------------------
     (Date)                 Charles E. Allen, Jr., Chairman of the Board
                                     and Chief Financial Officer
                       (Principal Executive, Financial and Accounting Officer)


                                      14