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: JUNE 30, 2003
                                                 --------------

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                 OF THE SECURITIES EXCHANGE ACT OF 1934


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


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

          TENNESSEE                                       62-1607709
---------------------------------               --------------------------------
    (STATE OF INCORPORATION)                           (I.R.S.  EMPLOYER
                                                        IDENTIFICATION NO.)


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


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


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


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

                             YES      X         NO
                                    ----

                                    1,465,512
                   ------------------------------------------
     (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 8, 2003)


           TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):

                             YES                NO    X
                                                     ----


<PAGE>


                        STATE OF FRANKLIN BANCSHARES, INC

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

        ITEM 1.   FINANCIAL STATEMENTS                                                     PAGE
                                                                                         -------
<S>                                                                                      <C>
                  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION                               3
                     JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002 (AUDITED)

                  CONSOLIDATED STATEMENTS OF INCOME                                        4 - 5
                     THREE MONTHS ENDED JUNE 30, 2003 (UNAUDITED) AND 2002 (UNAUDITED)
                     SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) AND 2002 (UNAUDITED)

                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                   6
                     THREE MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
                     AND YEAR ENDED DECEMBER 31, 2002 (AUDITED)

                  CONSOLIDATED STATEMENTS OF CASH FLOWS                                        7
                     SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED) AND 2002 (UNAUDITED)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                       8


         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS                                                14

         ITEM 3.  CONTROLS AND PROCEDURES                                                     16



PART II.   OTHER INFORMATION

        ITEM 1.   LEGAL PROCEEDINGS                                                           17

        ITEM 2.   CHANGES IN SECURITIES                                                       17

        ITEM 3.   DEFAULT UPON SENIOR SECURITIES                                              17

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

        ITEM 5.   OTHER INFORMATION                                                           17

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

</TABLE>


























                                       2


<PAGE>

PART 1  -  FINANCIAL INFORMATION

         ITEM 1.   FINANCIAL STATEMENTS

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

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                                                                  JUNE 30,          DECEMBER 31,
                             ASSETS                           2003 - UNAUDITED     2002 - AUDITED
-------------------------------------------------------------------------------------------------
<S>                                                              <C>                 <C>
Cash and Due from Banks                                          $   4,331,758       $  5,751,547
Federal Funds Sold                                                  29,680,000         12,705,000
Short-Term Interest Bearing Deposits                                 3,903,482          1,365,722
-------------------------------------------------------------------------------------------------
   Total Cash and Cash Equivalents                                  37,915,240         19,822,269
-------------------------------------------------------------------------------------------------
Investments - HTM
   (Estimated Market 2003 - $16,544,177 and 2002 - $15,736,381)     15,884,738         15,738,303
Investments - AFS                                                   62,959,170         62,028,662
Loans Held for Sale                                                  4,057,144          2,447,752
Loans and Leases Receivable                                        153,731,052        157,905,134
   Less: Allowance for Loan and Lease Losses                      (  1,851,710)      (  1,563,320)
-------------------------------------------------------------------------------------------------
   Loans and Leases Receivable, Net                                151,879,342        156,341,814
-------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net                                     1,452,726          1,502,448
Land, Buildings & Equip at Cost Less Accum Depr
   of $1,839,310 in 2003 and $1,673,028 in 2002                      6,066,272          5,760,767
Prepaid Expense and Accounts Receivable                                154,822            200,598
Deferred Tax Assets                                                    716,525            416,903
FHLB Stock                                                           2,308,100          2,263,100
Other Real Estate Owned                                              1,120,331          1,321,575
Other Assets                                                           164,000            188,000
-------------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                   $ 284,678,410       $268,032,191
=================================================================================================
             LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits                                           $  10,843,369       $ 11,354,070
Interest-Bearing Deposits                                          204,306,259        187,485,817
Advances to Borrowers for Taxes and Insurance                          268,399            115,191
Accrued Interest on Deposits                                           297,884            184,365
Accrued State and Federal Taxes                                         22,965            257,078
Other Accounts Payable and Accrued Expenses                            386,757            581,085
Repurchase Agreements                                                  318,484          1,049,781
FHLB Long-Term Advances                                             36,226,868         36,238,709
Deferred Credits on REO                                                115,983            144,338
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                         $ 252,786,968       $237,410,434
-------------------------------------------------------------------------------------------------

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                             (    98,429)           252,107
Retained Earnings                                                    9,156,826          7,711,127
  Less: Employee Stock Ownership                                   (   883,928)       ( 1,058,450)
-------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                $  23,891,442       $ 22,621,757
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 284,678,410       $268,032,191
=================================================================================================
</TABLE>


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

                                        3




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

                                                         THREE MONTHS ENDED JUNE 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2003 - UNAUDITED  2002 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                     <C>                  <C>
Interest and Fees on Loans                              $    2,693,268       $ 2,735,294
Other Interest Income                                          832,507         1,399,930
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 3,525,775         4,135,224
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         1,145,798         1,412,025
Interest on Repurchase Agreements                                3,303                79
Interest on Short-Term Debt                                      2,419                37
Interest on Long-Term Debt                                     437,592           417,938
Interest on Subordinated Debentures                            110,027           124,723
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                1,699,139         1,954,802
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           1,826,636         2,180,422
PROVISION FOR LOAN LOSSES                                     (113,833)         (127,500)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            1,712,803         2,052,922
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 135,588           108,134
Net Gain on Loans Sold                                         284,673            64,087
Real Estate Sales Commission Income                             70,522            56,059
Insurance Commission Income                                     24,763            20,376
Rental Income, Net                                              21,336            23,465
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                      536,882           272,121
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                              679,327           609,674
Occupancy Expenses                                             108,904            74,348
Furniture and Equipment Expense                                107,933           114,842
Advertising                                                     37,928            58,356
Data Processing Expense                                        147,135           116,499
Other                                                          274,159           386,458
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  1,355,386         1,360,177
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                                894,299           964,866
PROVISION FOR INCOME TAXES                                    (279,843)         (146,529)
----------------------------------------------------------------------------------------
       NET INCOME                                       $      614,456       $   818,337
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                 $         0.44       $      0.59
  DILUTED                                                         0.41              0.55
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,387,191         1,381,617
  DILUTED                                                    1,481,549         1,475,742
========================================================================================
</TABLE>


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


                                        4


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

                                                             SIX MONTHS ENDED JUNE 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2003 - UNAUDITED  2002 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                    <C>                   <C>
Interest and Fees on Loans                             $     5,509,996       $ 5,458,005
Other Interest Income                                        1,763,731         2,654,149
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 7,273,727         8,112,154
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         2,244,807         2,852,931
Interest on Repurchase Agreements                                7,154                79
Interest on Short-Term Debt                                      2,440                38
Interest on Long-Term Debt                                     870,885           786,705
Interest on Subordinated Debentures                            218,421           248,931
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                3,343,707         3,888,684
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           3,930,020         4,223,470
PROVISION FOR LOAN LOSSES                                   (  291,470)       (  275,000)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            3,638,550         3,948,470
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 259,929           221,533
Net Gain on Loans Sold                                         458,893           155,779
Realized Gain on Securities                                        231                 -
Real Estate Sales Commission Income                            139,911            56,059
Insurance Commission Income                                     44,638            39,334
Rental Income, Net                                              36,851            46,850
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                      940,453           519,555
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                            1,339,801         1,206,500
Occupancy Expenses                                             200,572           161,054
Furniture and Equipment Expense                                164,022           226,378
Advertising                                                     71,686            89,324
Data Processing Expense                                        256,408           242,944
Other                                                          527,324           778,160
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  2,559,813         2,704,360
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                              2,019,190         1,763,665
PROVISION FOR INCOME TAXES                                  (  573,491)       (  295,800)
----------------------------------------------------------------------------------------
       NET INCOME                                      $     1,445,699       $ 1,467,865
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                $          1.04       $      1.06
  DILUTED                                                          .98              1.00
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,384,778         1,379,826
  DILUTED                                                    1,479,021         1,472,576
========================================================================================
</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 THREE MONTHS ENDED JUNE 30, 2003 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2002 (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, 2001           1,465,512  14,251,461     (368,029)  4,526,987  (1,090,094)     18,785,837

ESOP Shares Allocated                        --           --           --          --       31,644         31,644

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Gains
        Arising During the Period
          (Net of $321,852 Income Tax)       --           --       527,249          --          --        527,249
      Less: Reclassification Adjustment
          (Net of $57,659 Income Tax)        --           --        92,886          --          --         92,886
                                                                                                     ------------
                                                                                                          620,135

  Net Income                                 --           --           --   3,184,141          --       3,184,141
                                                                                                     ------------
        Total Comprehensive Income           --           --           --          --          --       3,804,276
                                    ------------  ----------     ---------  ---------  ----------    ------------
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                        --           --           --          --     174,522         174,522

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Losses
        Arising During the Period
          (Net of $216,097 Income Tax)       --           --     (339,424)         --          --        (339,424)
      Less: Reclassification Adjustment
          (Net of $6,896 Tax Benefit)        --           --      (11,111)         --          --         (11,111)
                                                                                                     ------------
                                                                                                         (350,535)

  Net Income                                 --           --           --   1,445,698          --       1,445,698
                                                                                                     ------------
        Total Comprehensive Income           --           --           --          --          --       1,095,163
                                    ------------  ----------     ---------  ---------  -----------   ------------
Balance at June 30, 2003               1,465,512  14,251,461       (98,429) 9,156,826     (883,928)    23,891,442
                                    ============  ==========     =========  =========  ===========   ============

</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,
                                                                               ----------------------------------
                                                                               2003 - UNAUDITED  2002 - UNAUDITED
                                                                               ----------------  ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>                <C>
  Net Income                                                                      $   1,445,699      $ 1,467,865
  Items Not Affecting Cash:
    Depreciation                                                                        167,610          241,328
    (Increase) Decrease in Accrued Interest                                              49,722         (297,675)
    Deferred Income Taxes (Benefit)                                                     (86,957)         (27,640)
    Provision for Loan and Lease Losses                                                 291,470          275,000
    Decrease in Prepaid Expenses and Accounts Receivable                                 45,776           58,397
    Increase in Interest Payable                                                        113,519            4,719
    Increase (Decrease) in Accounts Payable and Accrued Expenses                       (428,441)          95,873
    Increase in Deferred Loan Fees, Net                                                  22,524           97,907
    Realized (Gain) on Securities                                                          (231)               -
    Discount Accretion                                                                  (92,866)        (386,446)
    Premium Amortization                                                                246,363           54,246
    Earned ESOP Shares                                                                  174,522          106,373
    FHLB Stock Dividends                                                                (45,000)         (49,700)
    Net (Increase) Decrease in Loans Held for Sale                                   (1,609,392)       1,945,470
-----------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                                         294,318        3,585,717
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Held-to-Maturity Investments                                           (9,607,148)     (17,856,308)
  Purchase of Available-for-Sale Investments                                         (6,758,589)      (3,901,585)
  Proceeds from Maturities of Held-to-Maturity Investments                            3,495,000        4,000,000
  Proceeds from Maturities of Available-for-Sale Investments                          3,423,358        6,350,865
  Principal Payments on Mortgage-backed Securities - AFS                              7,673,117        1,112,990
  (Increase) Decrease in Loans Receivable, Net                                        4,327,547      (16,324,828)
  Purchases of Premises and Equipment                                                  (474,443)        (459,061)
-----------------------------------------------------------------------------------------------------------------
    NET CASH (USED) BY INVESTING ACTIVITIES                                           2,078,842      (27,077,927)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase (Decrease) in Deposits                                                16,309,741       (1,805,787)
  Net Increase in Advances by Borrowers for Taxes and Insurance                         153,208          188,662
  Net Increase (Decrease) in Repurchase Agreements                                     (731,297)         637,959
  Repayment of FHLB Advances                                                            (11,841)          (4,269)
  Proceeds from FHLB Advances                                                                 -       (5,558,660)
-----------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                                        15,719,811        4,575,225
-----------------------------------------------------------------------------------------------------------------
      NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           18,092,971      (18,916,985)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                        19,822,269       33,900,338
-----------------------------------------------------------------------------------------------------------------
      CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $  37,915,240      $14,983,353
=================================================================================================================

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
  Net of Deferred Tax Liability                                                   $    (350,536)     $   528,858
Acquisition of Real Estate Property through Foreclosure of Related Loans          $   1,120,331      $ 1,654,849
=================================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash Paid During the Period for:
    Income Taxes                                                                  $     983,151      $ 1,054,041
    Interest                                                                      $   3,230,188      $ 3,883,963
=================================================================================================================
</TABLE>

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


                                        7


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

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

     State of Franklin  Bancshares,  Inc. (the "Company") was incorporated under
     the laws of the State of Tennessee  for the purpose of becoming the holding
     company  of State of  Franklin  Savings  Bank  (the  "Savings  Bank").  The
     stockholders  of the Savings Bank exchanged  their shares for the shares of
     the Company,  whereby the Savings Bank became a wholly owned  subsidiary of
     the Company.  State of Franklin  Leasing  Corporation (the "Leasing Corp.")
     was  incorporated  under the laws of the State of Tennessee for the purpose
     of lease financing.  State of Franklin Real Estate,  Inc. (the "Real Estate
     Company") was incorporated for the purpose of selling real estate. The Real
     Estate  Company and John  Sevier  Title  Services,  Inc.  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 six months ended June 30, 2003 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, 2002.


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, 2003  consolidated
     financial statements.


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

     Fixed assets at June 30, 2003,  and  December  31, 2002 are  summarized  as
     follows:

                                                        2003          2002
                                                    -----------   -----------
     Land                                             1,580,000     1,580,000
     Buildings and Leasehold Improvements             3,757,214     3,457,883
     Furniture, Fixtures and Equipment                2,568,368     2,395,912
                                                    -----------   -----------
                                                      7,905,582     7,433,795
     Less:  Accumulated Depreciation                 (1,839,310)   (1,673,028)
                                                    -----------   -----------
                                                      6,066,272     5,760,767
                                                    ===========   ===========


                                        8


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

     Loans  receivable  at June 30, 2003 and December  31, 2002,  consist of the
     following:

                                                   2003             2002
                                              --------------   --------------
  First Mortgage Loans                           54,461,321       57,183,220
  Construction Loans                             19,433,843       18,579,725
  Consumer Loans                                 11,934,106       13,679,529
  Participation Loans, Net                          470,379          481,399
  Commercial Loans                               65,784,939       66,392,958
  Credit Line Advances                              923,826          519,020
  Lease Finance                                   1,606,105        1,459,185
                                             ---------------  ---------------

    Gross Loans and Leases Receivable           154,614,519      158,295,036
                                             ---------------  ---------------

  Less:
    Undisbursed Portion of Loans in Process     (   614,498)     (   143,455)
    Net Deferred Loan Origination Fees          (   275,389)     (   246,447)
    Accumulated General Loan Loss Allowance     ( 1,851,710)     ( 1,563,320)
                                             ---------------  ---------------
                                                ( 2,735,177)     (12,598,933)
                                             ---------------  ---------------

  Loans and Leases Receivable, Net              151,879,342      156,341,814
                                             ===============  ===============

An  analysis  of the  allowance  for loan and lease  losses at June 30, 2003 and
December 31, 2002 is as follows:

                                                    2003             2002
                                              --------------   --------------
    Balance - Beginning of Period                 1,563,320        1,473,855
    Provision for Loan and Lease Losses             291,470          578,979
    Loans and Leases Charged-Off                 (    3,100)      (  489,857)
    Charged-Off Loan and Lease Recoveries                20              343
                                              --------------   --------------

    Balance - End of Period                       1,851,710        1,563,320
                                              ==============   ==============

     The gross  amount of  participation  loans  serviced  by State of  Franklin
     Savings  Bank was  $940,758 at June 30, 2003 and  $962,371 at December  31,
     2002.

     At June 30, 2003 the Company had  nonaccrual  loans  totaling  $2.3 million
     which included  $190,043 in impaired loans. 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  Company  had no loans or  leases  90 days or more  past due and  still
     accruing  and no  restructured  loans at June 30,  2003.  The  Company  had
     non-accrual loans totaling $1.1 million at December 31, 2002.






                                        9


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

The capital ratios for the 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, 2003:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        21,627    11.71%    >=18,474   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        19,983    10.82%    >=11,084    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       19,084     7.28%    >=13,721    5.0%

As of December 31, 2002:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        21,928    11.49%    >=19,085   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        20,441    10.71%    >=11,451    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       20,441     7.74%    >=13,213    5.0%


The capital ratios for the Company 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, 2003:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        31,474     16.98%   >=18,535    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        28,884     15.58%   >=11,121     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       28,884     10.47%   >=13,798     5.0%

As of December 31, 2002:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        31,594     16.51%   >=19,136    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        29,437     15.38%   >=11,482     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       29,437     11.08%   >=13,283     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 and funded for 1997. On February 28, 1998,  5,236
          shares of the  Savings  Bank with a fair value of $57,600  were issued
          for the 1997  contribution.  The Savings Bank stock was  exchanged for
          Company stock.

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

          On June 30, 2000,  the ESOP borrowed an  additional  $599,994 from the
          Company and used the funds to  purchase  44,444  additional  shares of
          common stock of the Company at $13.50 per share.  Note  payments  were
          $7,280  per month for ten years with a fixed  interest  rate of 8.00%.
          The note balance  outstanding  at December 31, 2000 was  $579,985.  In
          November 2001, the ESOP loans were consolidated into a seven year term
          loan  from  the  Company  in the  amount  of  $1,071,093  with a fixed
          interest  rate of 6.00%.  Note  payments  are $15,218 per month for 83
          months plus a final  principal  payment of $24,092.  The note  balance
          outstanding at June 30, 2003 was $853,228. Also, in November 2001, the
          Company granted a $300,000 line of credit to the ESOP for the purchase
          of additional shares of stock in the Company as it becomes  available.
          The interest rate for balances outstanding on the line of credit is 6%
          with a five  year  term.  Interest  is  paid  monthly  with  principal
          payments made as funds are  available.  At June 30, 2003,  there was a
          $30,700 balance outstanding on the line of credit.

          Shares owned by the ESOP at June 30, 2003 totaled 168,148. 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,
                                                           2003          2002
                                                    -------------  -------------
      Number of Shares
        Released and Allocated since Inception             72,361         62,665
        Suspense                                           76,307         86,003

      Fair Value
        Released and Allocated since Inception          1,302,498      1,127,970
        Suspense                                        1,373,526      1,548,054

          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,
                                                           2003           2002
                                                    -------------  -------------
      Compensation Expense                                204,000        330,000
      Contributions                                       204,000        330,000

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

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


                                       11

<PAGE>
     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, 2003        83,014    71,625     $12.00
                                                 During 2003             7,000     7,000      18.00
     Options Granted - Management                January 1, 2003       217,385   159,245      12.50
                                                 During 2003            11,658        --      18.00
                                                                       -------   -------
     Options Outstanding - June 30, 2003                               319,057   237,870     $12.69
                                                                       =======   =======
</TABLE>

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

     Deposit balances are summarized as follows:

<TABLE>
<CAPTION>
                                            June 30, 2003                December 31, 2002
                                    -----------------------------  -----------------------------
                                       Rate      Amount   Percent     Rate      Amount   Percent
                                    ------- -----------  --------  ------- -----------  --------
<S>                                    <C>  <C>             <C>       <C>  <C>            <C>
     Passbook                          1.53  76,906,742     35.75     2.04  63,942,676     32.16
     Interest-Free Checking              --  10,843,369      5.04       --  11,354,070      5.71
     NOW                               1.26  15,563,164      7.23     1.50  13,425,042      6.75
     Money Market Deposit              1.48  30,512,693     14.18     1.71  35,372,704     17.79
                                            -----------  --------          -----------  --------
                                            133,825,968     62.20          124,094,492     62.41
                                            -----------  --------          -----------  --------
     Fixed Term Certificate Accounts
      Balances $100,000 or greater     3.00  20,625,333      9.59     3.31  19,388,917      9.75
      Balances less than $100,000      2.89  60,698,327     28.11     3.08  55,356,478     27.84
                                            -----------  --------          -----------  --------
                                             81,323,660     37.80           74,745,395     37.59
                                            -----------  --------          -----------  --------
                                            215,149,628    100.00          198,839,887    100.00
                                            ===========  ========          ===========  ========
</TABLE>
The contractual  maturity of certificate  accounts at June 30, 2003 and December
31, 2002, is as follows:

           Period Ending June 30, 2003             Year Ending December 31, 2002
         --------------------------------          -----------------------------
            2003             28,515,366              2003            49,359,359
            2004             30,863,639              2004            11,390,081
            2005             12,690,399              2005            11,253,040
            2006              4,304,049              2006               737,993
            2007 and After    4,950,207              2007 and After   2,004,922
                             ----------                              ----------
                             81,323,660                             74,745,395
                             ==========                              ==========

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

Advances from FHLB are summarized as follows for the periods ended June 30, 2003
and December 31, 2002:

         Contractual Maturity                            2003             2002
         --------------------                        -----------     -----------

         Convertible Fixed Rate (Within 10 Years)    35,000,000       35,000,000
         Matched-Funding (30-Year Amortizing)         1,226,868        1,238,709

         Weighted Average Rate                            4.85%            4.85%

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.

                                       12
<PAGE>
NOTE 10     INVESTMENT SECURITIES
-------     ---------------------

The amortized cost and fair value of investment securities  held-to-maturity and
available-for-sale at June 30, 2003, by contractual  maturity,  are shown below.
Expected maturities will differ from contractual  maturities because issuers may
have  the  right  to call  or  prepay  obligations  without  call or  prepayment
penalties.
<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                3,579,836      14,982           --     3,594,818
               After one year
                 but within five years        2,094,653       8,580       31,788     2,071,445
               After five years
                 but within ten years         1,111,771          --        3,115     1,108,656
               After ten years
                 but within fifteen years       999,766      12,391           --     1,012,157

          Collateralized Mortgage Obligations:
               After five years
                 but within ten years           292,887      23,388           --       316,275

              Municipal Securities Maturing:
               Within one year                  130,000       3,277           --       133,277
               After one year
                 but within five years          575,000      53,271           --       628,271
               After five years
                 but within ten years         4,182,778     340,466           --     4,523,244
               After ten years
                 but within fifteen years    10,516,376     968,086           --    11,484,462
               After fifteen years
                 but within twenty years      3,688,386     317,282           --     4,005,668
               After 20 years                 2,020,589      85,405       54,407     2,051,587

         Corporate Securities Maturing:
               After one year
                 but within five years        1,386,689      50,381           --     1,437,070
               After five years
                 but within ten years         4,520,544     117,781           --     4,638,325
               After ten years
                 but within fifteen years     2,100,000       9,849           --     2,109,849
               After twenty years             1,729,936     128,309           --     1,858,245

          Equity Securities
                Callable within one year     17,936,392      63,608    2,980,000    15,020,000
                Callable after one year
                  but within five years       4,422,998     400,000        6,777     4,816,221
                Callable after five years
                  but within ten years        1,000,000      65,400           --     1,065,400

          Other
               After 20 years                   830,084     254,116           --     1,084,200
                                             ----------   ---------    ---------   -----------
                  Total Available-for-Sale   63,118,685   2,916,572    3,076,087    62,959,170
                                             ==========   =========    =========   ===========
     Held-to-Maturity:
          United States Government
            Agency Securities Maturing:
               After five years
                 but within ten years         4,503,248      10,975           --     4,514,223
               After ten years
                 but within fifteen years     2,995,938         219        8,238     2,987,919
               After 20 years                 1,479,885      30,545           --     1,510,430

          Collateralized Mortgage Obligations:
               After ten years
                 but within fifteen years       987,885          53           --       987,938
               After twenty years             1,222,584           2        4,116     1,218,470

          Corporate Securities Maturing:
               After one year
                 but within five years        1,031,934      66,095           --     1,098,029
               After five years
                 but within ten years           500,462      26,839           --       527,301
               After twenty years             3,162,802     538,088           --     3,700,890
                                             ----------     -------    ---------   -----------
                  Total Held-to-Maturity     15,884,738     672,816       12,354    16,545,200
                                             ==========     =======    =========   ===========

                                       13
<PAGE>
</TABLE>
NOTE 11     EARNINGS PER SHARE
-------     ------------------

Earnings per share for three months and six months ended June 30, 2003, compared
with the same period in 2002, are as follows:

<TABLE>
<CAPTION>
                                                     Three Months Ended         Six Months Ended
                                                          June 30,                  June 30,
                                                      2003        2002          2003        2002
                                                   ---------   ---------    ----------   ----------
<S>                                               <C>         <C>           <C>         <C>
Net Income                                        $  614,456  $  818,337    $1,445,699  $1,467,865

Average Basic Shares Outstanding                   1,387,191   1,381,617     1,384,778   1,379,826

Basic Earnings Per Share                                 .44         .59          1.04        1.06
                                                  ==========  ==========    ==========  ==========

Net Income                                           614,456     818,337     1,445,699   1,467,865

Average Basic Shares Outstanding                   1,387,191   1,381,617     1,384,778   1,379,826
Dilutive Effect Due to Stock Options                  94,125      91,358        94,243      92,750
                                                  ----------  ----------    ----------  ----------
Average Shares Outstanding, as Adjusted            1,481,549   1,475,742     1,479,021   1,472,576

Diluted Earnings Per Share                        $      .41  $     0.55    $      .98  $     1.00
                                                  ==========  ==========    ==========  ==========
</TABLE>

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

     GENERAL
     -------

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

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

     At June 30, 2003,  assets of the Company totaled $284.7 million  reflecting
     an increase of $16.6 million or 6% since  December 31, 2002.  The growth in
     assets has been funded primarily by a $16.3 million increase in deposits.

     LOANS
     -----

     Loans  outstanding  totaled  $154.6  million at June 30, 2003 compared with
     $158.3 million at December 31, 2002.  First  mortgage loans  decreased $2.7
     million and consumer  loans  declined  $1.3 million  while  commercial  and
     construction loans increased  slightly.  The loan portfolio mix at June 30,
     2003 consists of 36% residential mortgages, 43% commercial, 12% real estate
     construction, and 9% consumer loans.

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

     Investment   securities  totaled  $79.0  million  at  June  30,  2003.  The
     investment  portfolio  at quarter end  consisted  of $16.8  million in debt
     securities issued by the U.S. Government or Federal Agencies,  $2.5 million
     in collateralized mortgage obligations,  $22.8 million in securities issued
     by state, county, or municipalities, $14.4 million in corporate securities,
     $20.9  million in  preferred  stock  issued by Federal  Agencies,  and $1.1
     million in other equity securities.

     At June 30, 2003, securities categorized as available-for-sale  totaled $63
     million  while  the  held-to-maturity   securities  totaled  $15.9  million
     compared  to  $62  million  in  available-for-sale  and  $15.7  million  in
     held-to-maturity   at  December   31,   2002.   At  June  30,   2003,   the
     available-for-sale  portfolio had net  unrealized  losses of $159,515 while
     our held-to-maturity securities had $660,462 in net unrealized gains.

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

     At June 30, 2003 the Company had  nonaccrual  loans  totaling  $2.3 million
     compared  with $1.1 million at December 31, 2002.  The reserve for loan and
     lease losses was  $1,851,710 at June 30, 2003, or 1.20% of loans and leases
     outstanding,  net of unearned  income and loans held for sale,  compared to
     $1,563,320 or .99% at December 31, 2002.  Management believes the allowance
     for loan losses is adequate to provide for potential loan losses.

     DEPOSITS
     --------

     Total deposits at June 30, 2003 of $215.1 million, reflected an increase of
     $16.3  million or a 8% increase  from $198.8  million at December 31, 2002.
     Noninterest  bearing  demand  deposits  totaled  $10.8 million at June 30,
     2003,  a decrease of $511,000  from  December 31,  2002.  Interest  bearing
     deposits increased $16.8 million to $204.3 million at June 30, 2003.

     CAPITAL
     -------

     Tier 1 capital for the Savings  Bank at June 30, 2003 was $20  million.  At
     June  30,  2003,  all  capital  ratios  were in  excess  of the  regulatory
     minimums,  with the Savings Bank's Tier 1, total  risk-based,  and leverage
     ratios of 10.82%, 11.71% and 7.28%, respectively.

     Tier 1 capital for the Company at June 30,  2003,  was $28.9  million  with
     Tier 1,  total  risk-based,  and  leverage  ratios of 15.58%,  16.98%,  and
     10.47%, respectively.

     LIQUIDITY
     ---------

     The purpose of liquidity  management  is to ensure that there is sufficient
     cash flow to satisfy  demands for credit,  deposit  withdrawals,  and other
     corporate needs.  Traditional sources of liquidity include asset maturities
     and growth in core deposits. Other sources of funds such as securities sold
     under  agreements to  repurchase,  negotiable  certificates  of deposit and
     other  liabilities  are  sources  of  liquidity  that the  Company  has not
     significantly used. The Company had unused sources of liquidity in the form
     of unused  federal  funds lines of credit and an unused line of credit with
     the Federal Home Loan Bank of  Cincinnati  totaling $62 million at June 30,
     2003.

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

     The Company had net income of $614,456 for the three months ending June 30,
     2003, compared with $818,337 for the same period last year,  resulting in a
     decrease  of 24%.  Return  on  average  assets  was .89% and the  return on
     average  equity  was  10.52%  for the three  months  ended  June 30,  2003,
     compared with 1.27% and 16.89%, respectively,  for the same period in 2002.
     For the six months ending June 30, 2003, net income was $1,445,699 compared
     with $1,467,865 for the first six months in 2002.  Return on average assets
     and average equity was 1.07% and 12.61%, respectively,  compared with 1.16%
     and 15.51% for the six month period ended June 30, 2002. For the six months
     ended June 30,  2003,  net income per diluted  share was $0.98  compared to
     earnings per share of $1.00 for the same period in 2002.

     Noninterest income increased $420,898,  or 81%, during the six months ended
     June 30, 2003,  compared the same period last year as a result of increases
     in other fees and service charges,  gains on loans sold,  realized gains on
     securities,  real  estate  sales  commission,  and  insurance  commissions.
     Partially  offsetting the increases was a decline in rental  income.  Areas
     contributing  significantly to the increase in noninterest  income included
     the increase in real estate sales  commission  income generated as a result
     of the creation of State of Franklin  Real Estate  during the first quarter
     of 2002  and the  increase  in gains on  loans  sold.  Gains on loans  sold
     increased over the same period last year as a result of both refinancing of
     existing homes and increased activity in the housing market.

     Noninterest expense was $2,559,813 for the six months ending June 30, 2003,
     a decrease $144,547,  or 5% under the 2002 period,  resulting from declines
     in  furniture  and  equipment  expense,  advertising,  and other  operating
     expenses. The decline was partially offset by increases in compensation and
     related benefits, occupancy, and advertising expense.

                                       15
<PAGE>

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

     Interest income and interest  expense both decreased from 2002 to 2003 as a
     result of declining  interest rates;  consequently,  net interest income of
     $3,930,020  for the six months  ended June 30, 2003  reflects a decrease of
     $293,450 or 7% under the same period last year.  For the six months  ending
     June 30, 2003,  average earning assets  increased $13.7 million or 6% while
     average  interest  bearing  liabilities  increased  $11.7  million,  or 5%,
     compared  with the same  period in 2002.  The taxable  equivalent  yield on
     earning  assets  declined  1.11% to 5.87% for the first six  months of 2003
     compared  with the same period in 2002 while the cost on  interest  bearing
     liabilities  declined 62 basis points to 2.84%.  Consequently,  the taxable
     equivalent net interest margin based on average earning assets decreased to
     3.29% for the six months  ending June 30, 2003  compared with 3.81% for the
     same period in 2002.

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

     During the six months ended June 30, 2003,  the provision for possible loan
     losses was $291,470  compared  with $275,000 for the same period last year.
     There were $3,080 in loan or lease  charge-offs  net of recoveries  for the
     six months  ended June 30, 2003,  compared  with  $323,039  during the same
     period in 2002. The allowance for possible loan losses represented 1.20% of
     total  loans,  net of  mortgage  loans  held-for-sale,  at June  30,  2003,
     compared to .93% at June 30, 2002.  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, 2003, the provision for federal and state
     income taxes were $573,491, an increase of $277,691 from 2002. The increase
     is due to a higher level of taxable income over the same period in 2002.

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

     The Company's  noninterest  income was $940,453 during the six months ended
     June 30,  2003,  an increase of  $420,898 or 81% from the  comparable  2002
     period.  During  2003,  other fees and service  charges,  net gain on loans
     sold,  realized  gain on  securities,  real estate sales  commissions,  and
     insurance commission income increased $38,396, $303,114, $231, $83,852, and
     $5,304,  respectively.  Partially  offsetting  the increases in noninterest
     income was a $9,999 decline in rental income.

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

     Noninterest expense totaled $2,559,813 for the six month period ending June
     30,  2003, a decrease of $144,547 or 5%. The decrease was the net result of
     a $62,356 decrease in furniture and equipment  expense,  a $17,638 decrease
     in advertising expense, and a $250,836 decrease in other operating expenses
     combined with increases in compensation  and benefits,  occupancy  expense,
     and  data   processing   expense  of   $133,301,   $39,518,   and  $13,464,
     respectively.

ITEM 3  CONTROLS AND PROCEDURES
------  -----------------------

     (a)  Evaluation of Disclosure Controls and Procedures. As of the end of the
          period covered by this report,  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)). Based on that evaluation, the
          President  and the Chief  Executive  Officer have  concluded  that the
          Company's  disclosure  controls and procedures are effective to ensure
          that  material  information  relating to the Company and the Company's
          consolidated  subsidiaries  is made known to such  officers  by others
          within these entities,  particularly  during the period this quarterly
          report was  prepared,  in order to allow  timely  decisions  regarding
          required disclosure.

     (b)  Changes in  Internal  Controls.  There  have not been any  significant
          changes in the  Company's  internal  controls or in other factors that
          could  significantly  affect these controls  subsequent to the date of
          their evaluation.

                                      16

<PAGE>
PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

          None

ITEM 2.   CHANGES IN SECURITIES

          None

ITEM 3.   DEFAULT UPON SENIOR SECURITIES

          None

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

          At the Annual Meeting on May 20, 2003, 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 2006 annual meeting of shareholders.  Current directors elected to
          three-year terms were as follows:

                                               FOR           WITHHOLD AUTHORITY
                                            ---------        ------------------
          Charles E. Allen, Sr., M.D.        1,071,888             7,450
          Donald R. Jeanes                   1,072,688             6,650
          Alan R. Hubbard                    1,073,388             5,950
          Richard S. Venable                 1,072,688             6,650

     Directors continuing to serve include:

          Charles E. Allen, Jr.      Randal R. Greene    Vance W. Cheek
          Kenneth E. Cutshall, M.D.  Steven K. Gross     Verrill M. Norwood, Jr.
          Cameron E. Perry           Henry J. Williams, M.D.

          2.   Ratified  the  appointment  of Baylor & Backus  as the  Company's
               independent accountants and auditors for 2003 as follows:

               FOR           AGAINST          ABSTAIN         BROKER NON-VOTES
             ------          -------          -------         ----------------
           1,073,813          3,375            2,150                 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 302 of the  Sarbanes-Oxley
               Act of 2002.

          31.2 Certification of Charles E. Allen, Jr., the Chairman of the Board
               and Chief Executive Officer (Principal  Executive,  Financial and
               Accounting  Officer)  of  State  of  Franklin  Bancshares,   Inc.
               pursuant to Section 302 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 (Principal  Executive,  Financial and
               Accounting  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, 2003.




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<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 12, 2003                            /s/ Randal R. Greene
-------------------------                     ----------------------------------
         (Date)                                   Randal R. Greene, President





    August 12, 2003                            /s/ Charles E. Allen, Jr.
-------------------------                     ----------------------------------
         (Date)                                     Charles E. Allen, Jr.,
                                                   Chairman of the Board
                                                 and Chief Executive Officer
                                                (Principal Executive, Financial
                                                   and Accounting Officer)











































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