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, 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  SECURITIES  EXCHANGE  ACT  DURING THE PAST 12 MONTHS (OR FOR
SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),  AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

                                 YES    X    NO
                                      ----

                                    1,465,512
                   ------------------------------------------
    (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF NOVEMBER 10, 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
                     SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002 (AUDITED)

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

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

                  CONSOLIDATED STATEMENTS OF CASH FLOWS                                        7
                     NINE MONTHS ENDED SEPTEMBER 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


                                                                SEPTEMBER 30,       DECEMBER 31,
                             ASSETS                           2003 - UNAUDITED     2002 - AUDITED
-------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>
Cash and Due from Banks                                          $   5,808,129      $   5,751,547
Federal Funds Sold                                                  28,600,000         12,705,000
Short-Term Interest Bearing Deposits                                 3,581,876          1,365,722
-------------------------------------------------------------------------------------------------
   Total Cash and Cash Equivalents                                  37,990,005         19,822,269
-------------------------------------------------------------------------------------------------
Investments - HTM
   (Estimated Market 2003 - $27,397,366 and 2002 - $15,736,381)     27,344,408         15,738,303
Investments - AFS                                                   67,204,988         61,213,653
Loans Held for Sale                                                  2,635,009          2,447,752
Loans and Leases Receivable                                        147,642,043        157,905,134
   Less: Allowance for Loan and Lease Losses                      (  1,883,329)      (  1,563,320)
-------------------------------------------------------------------------------------------------
   Loans and Leases Receivable, Net                                145,758,714        156,341,814
-------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net                                     1,472,386          1,502,448
Land, Buildings & Equip at Cost Less Accum Depr
   of $1,948,484 in 2003 and $1,673,028 in 2002                      6,119,798          5,760,767
Prepaid Expense and Accounts Receivable                                147,655            200,598
Deferred Tax Assets                                                    798,168            416,903
FHLB Stock                                                           2,331,300          2,263,100
Investment in Service Bureau at Cost                                   815,009            815,009
Other Real Estate Owned                                              1,259,394          1,321,575
Other Assets                                                           152,000            188,000
-------------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                   $ 294,028,833      $ 268,032,191
=================================================================================================
             LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits                                           $  12,448,707      $  11,354,070
Interest-Bearing Deposits                                          211,454,497        187,485,817
Advances to Borrowers for Taxes and Insurance                          260,096            115,191
Accrued Interest on Deposits                                           147,140            184,365
Accrued State and Federal Taxes                                         28,821            257,078
Other Accounts Payable and Accrued Expenses                            568,925            581,085
Repurchase Agreements                                                  256,258          1,049,781
FHLB Long-Term Advances                                             36,217,301         36,238,709
Deferred Credits on REO                                                115,983            144,338
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES                                         $ 261,497,728      $ 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                             (   192,422)           252,107
Retained Earnings                                                    9,825,921          7,711,127
  Less: Employee Stock Ownership                                   (   819,367)       ( 1,058,450)
-------------------------------------------------------------------------------------------------
       TOTAL STOCKHOLDERS' EQUITY                                $  24,531,105      $  22,621,757
-------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 294,028,833      $ 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 SEPTEMBER 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2003 - UNAUDITED  2002 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                     <C>                <C>
Interest and Fees on Loans                              $    2,389,306     $   2,905,053
Other Interest Income                                          970,352         1,236,033
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                 3,359,658         4,141,086
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         1,098,680         1,335,117
Interest on Repurchase Agreements                                  984             3,146
Interest on Short-Term Debt                                        113                25
Interest on Long-Term Debt                                     439,879           441,434
Interest on Subordinated Debentures                            107,502           123,851
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                1,647,158         1,903,573
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           1,712,500         2,237,513
PROVISION FOR LOAN LOSSES                                     (100,892)         (127,500)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            1,611,608         2,110,013
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 144,598           114,537
Net Gain on Loans Sold                                         291,219            87,469
Realized Gain on Securities                                        229           255,758
Real Estate Sales Commission Income                             82,141            55,454
Insurance Commission Income                                     25,514            16,703
Rental Income, Net                                              26,093            28,430
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                      569,794           558,351
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                              715,471           653,955
Occupancy Expenses                                             122,122           108,165
Furniture and Equipment Expense                                 99,794           112,300
Advertising                                                     55,529            53,186
Data Processing Expense                                        143,094           133,379
Other                                                          207,682           373,824
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  1,343,692         1,434,809
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                                837,710         1,233,555
PROVISION FOR INCOME TAXES                                    (168,614)         (257,611)
----------------------------------------------------------------------------------------
       NET INCOME                                       $      669,096     $     975,944
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                 $         0.48     $        0.71
  DILUTED                                                         0.44              0.66
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,391,545         1,381,397
  DILUTED                                                    1,508,164         1,475,523
========================================================================================
</TABLE>


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






                                          4

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

                                                         NINE MONTHS ENDED SEPTEMBER 30,
                                                      ----------------------------------
INTEREST INCOME:                                      2003 - UNAUDITED  2002 - UNAUDITED
                                                      ----------------  ----------------
<S>                                                    <C>               <C>
Interest and Fees on Loans                             $     7,899,302   $     8,363,058
Other Interest Income                                        2,734,083         3,890,182
----------------------------------------------------------------------------------------
       TOTAL INTEREST INCOME                                10,633,385        12,253,240
----------------------------------------------------------------------------------------

INTEREST EXPENSE:
Interest on Deposits                                         3,343,486         4,188,048
Interest on Repurchase Agreements                                8,138             3,225
Interest on Short-Term Debt                                        169                63
Interest on Long-Term Debt                                   1,313,148         1,228,139
Interest on Subordinated Debentures                            325,923           372,782
----------------------------------------------------------------------------------------
       TOTAL INTEREST EXPENSE                                4,990,864         5,792,257
----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS           5,642,251         6,460,983
PROVISION FOR LOAN LOSSES                                   (  392,362)       (  402,500)
----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS            5,250,159         6,058,483
----------------------------------------------------------------------------------------

OTHER INCOME:
Other Fees and Service Charges                                 404,527           336,070
Net Gain on Loans Sold                                         750,112           243,248
Realized Gain on Securities                                        460           255,758
Real Estate Sales Commission Income                            222,052           111,513
Insurance Commission Income                                     70,152            56,037
Rental Income, Net                                              62,944            75,280
----------------------------------------------------------------------------------------
       TOTAL OTHER INCOME                                    1,510,247         1,077,906
----------------------------------------------------------------------------------------

OTHER EXPENSES:
Compensation and Related Benefits                            2,055,272         1,860,455
Occupancy Expenses                                             322,694           269,219
Furniture and Equipment Expense                                263,816           338,678
Advertising                                                    127,215           142,510
Data Processing Expense                                        399,502           376,323
Other                                                          735,008         1,151,984
----------------------------------------------------------------------------------------
       TOTAL OTHER EXPENSES                                  3,903,507         4,139,169
----------------------------------------------------------------------------------------
       INCOME BEFORE INCOME TAX                              2,856,899         2,997,220
PROVISION FOR INCOME TAXES                                  (  742,105)       (  553,411)
----------------------------------------------------------------------------------------
       NET INCOME                                      $     2,114,794   $     2,443,809
========================================================================================
EARNINGS PER SHARE:
  BASIC                                                $          1.52   $          1.77
  DILUTED                                                         1.42              1.66
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
  BASIC                                                      1,387,058         1,380,356
  DILUTED                                                    1,488,847         1,473,569
========================================================================================
</TABLE>

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



                                        5


<PAGE>

<TABLE>
<CAPTION>

                                         STATE OF FRANKLIN BANCSHARES, INC.
                             CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR NINE MONTHS ENDED SEPTEMBER 30, 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                         --          --           --          --     239,083         239,083

Comprehensive Income
  Other Comprehensive Income,
    Net of Tax:
    Unrealized Gains on Securities
      Available-For-Sale:
      Unrealized Holding Losses
        Arising During the Period
          (Net of $274,433 Income Tax)        --          --     (433,417)         --          --        (433,417)
      Less: Reclassification Adjustment
          (Net of $6,896 Tax Benefit)         --          --      (11,111)         --          --         (11,111)
                                                                                                     ------------
                                                                                                         (444,528)

  Net Income                                  --          --           --   2,114,793          --       2,114,793
                                                                                                     ------------
        Total Comprehensive Income            --          --           --          --          --       1,670,265
                                      ----------  ----------     --------   ---------  -----------   ------------
Balance at September 30, 2003          1,465,512  14,251,461     (192,422)  9,825,921    (819,367)     24,531,105
                                      ==========  ==========     ========   =========  ===========   ============

</TABLE>

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


                                        6


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

<TABLE>
<CAPTION>
                                                                                  NINE MONTHS ENDED SEPTEMBER 30,
                                                                               ----------------------------------
                                                                               2003 - UNAUDITED  2002 - UNAUDITED
                                                                               ----------------  ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>               <C>
  Net Income                                                                      $   2,114,794     $  2,443,809
  Items Not Affecting Cash:
    Depreciation                                                                        277,448          361,993
    (Increase) Decrease in Accrued Interest                                              30,062         (122,363)
    Deferred Income Taxes (Benefit)                                                    (102,975)         (86,167)
    Provision for Loan and Lease Losses                                                 392,362          402,500
    Decrease in Prepaid Expenses and Accounts Receivable                                 52,943          100,541
    Increase (Decrease) in Interest Payable                                             (37,225)           7,528
    (Decrease) in State and Federal Taxes Payable                                      (228,257)               -
    Increase (Decrease) in Other Accounts Payable and Accrued Expenses                  (12,160)         338,970
    Increase in Deferred Loan Fees, Net                                                  17,429          117,088
    Realized (Gain) on Securities                                                          (460)        (255,758)
    Discount Accretion                                                                 (127,151)        (398,579)
    Premium Amortization                                                                464,154                -
    Earned ESOP Shares                                                                  239,083           20,269
    FHLB Stock Dividends                                                                (68,200)         (76,100)
    Net (Increase) in Loans Held for Sale                                              (187,257)        (923,280)
-----------------------------------------------------------------------------------------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                                       2,824,590        1,930,451
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Held-to-Maturity Investments                                          (23,289,301)     (20,357,390)
  Purchase of Available-for-Sale Investments                                        (14,014,267)      (5,897,039)
  Proceeds from Maturities of Held-to-Maturity Investments                            3,495,000        8,000,000
  Proceeds from Maturities of Available-for-Sale Investments                          4,423,358       11,484,105
  Proceeds from Sale of Available-for-Sale Securities - AFS                                   -          673,487
  Principal Payments on Mortgage-backed Securities - AFS                             10,766,400        3,353,845
  (Increase) Decrease in Loans Receivable, Net                                       10,207,136      (20,399,872)
  Purchases of Premises and Equipment                                                  (638,471)        (551,120)
-----------------------------------------------------------------------------------------------------------------
    NET CASH (USED) BY INVESTING ACTIVITIES                                          (9,050,145)     (23,693,984)
-----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase (Decrease) in Deposits                                                25,063,317       (1,042,735)
  Net Increase in Advances by Borrowers for Taxes and Insurance                         144,905          158,095
  Net Increase (Decrease) in Repurchase Agreements                                     (793,523)         708,936
  Repayment of FHLB Advances                                                            (21,408)          (8,844)
  Proceeds from FHLB Advances                                                                 -       (5,936,560)
-----------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY FINANCING ACTIVITIES                                        24,393,291        5,752,012
-----------------------------------------------------------------------------------------------------------------
      NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           18,167,736      (16,011,521)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                        19,822,269       33,900,338
-----------------------------------------------------------------------------------------------------------------
      CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $  37,990,005     $ 17,888,817
=================================================================================================================

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
  Net of Deferred Tax Liability                                                   $    (444,529)    $  1,254,791
Acquisition of Real Estate Property through Foreclosure of Related Loans          $   1,259,394     $  1,516,904
=================================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash Paid During the Period for:
    Income Taxes                                                                  $   1,180,682     $  1,232,381
    Interest                                                                      $   5,028,089     $  5,784,729
=================================================================================================================
</TABLE>


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







                                        7



<PAGE>

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

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

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


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

     The accompanying  consolidated financial statements include the accounts of
     the Company and its subsidiaries. All significant intercompany accounts and
     transactions have been eliminated. These financial statements were prepared
     in accordance  with generally  accepted  accounting  principles for interim
     financial  information  and in accordance  with the  instructions  for Form
     10-QSB.  Accordingly,  they do not include all disclosures  necessary for a
     complete   presentation  of  the   consolidated   statements  of  financial
     condition,  income,  cash  flows,  and changes in  stockholders'  equity in
     conformity with generally  accepted  accounting  principles.  However,  all
     adjustments which are, in the opinion of management, necessary for the fair
     presentation of the interim  financial  statements have been included.  All
     such adjustments are of a normal recurring nature.  The statement of income
     for the nine months ended September 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  September  30,  2003
     consolidated financial statements.


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

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

                                                         2003          2002
                                                      -----------   -----------
     Land                                               1,580,000     1,580,000
     Buildings and Leasehold Improvements               3,806,250     3,457,883
     Furniture, Fixtures and Equipment                  2,682,032     2,395,912
                                                      -----------   -----------
                                                        8,068,282     7,433,795
     Less:  Accumulated Depreciation                   (1,948,484)   (1,673,028)
                                                      -----------   -----------
                                                        6,119,798     5,760,767
                                                      ===========   ===========



                                        8



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

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

                                                   2003              2002
                                              --------------   --------------
  First Mortgage Loans                           51,050,595       57,183,220
  Construction Loans                             21,042,223       18,579,725
  Consumer Loans                                 12,702,381       13,679,529
  Participation Loans, Net                          464,161          481,399
  Commercial Loans                               60,921,208       66,392,958
  Credit Line Advances                            1,087,565          519,020
  Lease Finance                                   1,585,351        1,459,185
                                             ---------------  ---------------

    Gross Loans and Leases Receivable           148,853,484      158,295,036
                                             ---------------  ---------------

  Less:
    Undisbursed Portion of Loans in Process     (   947,568)     (   143,455)
    Net Deferred Loan Origination Fees          (   263,873)     (   246,447)
    Accumulated General Loan Loss Allowance     ( 1,883,329)     ( 1,563,320)
                                             ---------------  ---------------
                                                ( 3,094,770)     (12,598,933)
                                             ---------------  ---------------

  Loans and Leases Receivable, Net              145,758,714      156,341,814
                                             ===============  ===============

    An  analysis of the  allowance  for loan and lease losses at  September  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             392,362          578,979
    Loans and Leases Charged-Off                 (   72,373)      (  489,857)
    Charged-Off Loan and Lease Recoveries                20              343
                                              --------------   --------------

    Balance - End of Period                       1,883,329        1,563,320
                                              ==============   ==============

     The gross  amount of  participation  loans  serviced  by State of  Franklin
     Savings Bank was  $928,322 at  September  30, 2003 and $962,371 at December
     31, 2002.

     At  September  30, 2003 the  Company had  nonaccrual  loans  totaling  $3.3
     million which included $146,630 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 September 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 Savings Bank are as follows:


                                                           For Capital
                                                            Adequacy
                                                            Purposes
                                                          And To Be Well
                                                        Capitalized Under
                                                        Prompt Corrective
                                         Actual          Action Provision
                                     ----------------    ----------------
In Thousands                         Amount    Ratio     Amount    Ratio
---------------------------          ----------------    ----------------
As of September 30, 2003:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        23,713    12.21%    >=19,427   10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        22,138    11.39%    >=11,656    6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       22,138     7.66%    >=14,447    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                         Amount    Ratio    Amount    Ratio
---------------------------          -----------------  ------------------

As of September 30, 2003:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)        33,613     17.26%   >=19,477    10.0%

  Tier 1 Capital
    (to Risk-Weighted Assets)        31,691     16.27%   >=11,686     6.0%

  Tier 1 Capital
    (to Adjusted Total Assets)       31,691     10.86%   >=14,584     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  ("ESOP")  for those
     employees who meet the  eligibility  requirements of the plan. The ESOP was
     established and funded for 1997. On February 28, 1998,  5,236 shares of the
     Savings  Bank  with a fair  value  of  $57,600  were  issued  for the  1997
     contribution. The Savings Bank stock was exchanged for Company stock.

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

     On June 30, 2000, the ESOP borrowed an additional $599,994 from the Company
     and used the funds to purchase 44,444  additional shares of common stock of
     the Company at $13.50 per share.  Note  payments  were $7,280 per month for
     ten years with a fixed interest rate of 8.00%. The note balance outstanding
     at December 31, 2000 was $579,985.  In November  2001,  the ESOP loans were
     consolidated  into a seven year term loan from the Company in the amount of
     $1,071,093  with a fixed interest rate of 6.00%.  Note payments are $15,218
     per month for 83 months plus a final principal payment of $24,092. The note
     balance  outstanding at September 30, 2003 was $819,367.  Also, in November
     2001,  the  Company  granted a $300,000  line of credit to the ESOP for the
     purchase  of  additional  shares  of stock  in the  Company  as it  becomes
     available. The interest rate for balances outstanding on the line of credit
     is 6% with a five  year  term.  Interest  is paid  monthly  with  principal
     payments made as funds are available.  At September 30, 2003,  there was no
     balance outstanding on the line of credit.

     Shares owned by the ESOP at September 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:

                                                      September 30, December 31,
                                                          2003          2002
                                                     ------------- -------------
      Number of Shares
        Released and Allocated since Inception           75,947         62,665
        Suspense                                         72,721         86,003

      Fair Value
        Released and Allocated since Inception        1,518,940      1,127,970
        Suspense                                      1,454,420      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:
                                                     September 30,  December 31,
                                                          2003           2002
                                                     -------------  ------------
      Compensation Expense                              306,000        330,000
      Contributions                                     306,000        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            16,047        --      18.55
                                                                       -------   -------
     Options Outstanding - September 30, 2003                          323,446   237,870     $12.79
                                                                       =======   =======
</TABLE>
NOTE 8     DEPOSITS
-------   ----------
     Deposit balances are summarized as follows:
<TABLE>
<CAPTION>
                                          September 30, 2003              December 31, 2002
                                    -----------------------------  -----------------------------
                                      Rate     Amount     Percent    Rate     Amount     Percent
                                    ------- -----------  --------  ------- -----------  --------
<S>                                    <C>  <C>            <C>        <C>  <C>            <C>
     Passbook                          1.74  83,717,617     37.39     2.04  63,942,676     32.16
     Interest-Free Checking              --  12,448,707      5.56       --  11,354,070      5.71
     NOW                               1.17  16,753,494      7.48     1.50  13,425,042      6.75
     Money Market Deposit              1.50  29,406,986     13.14     1.71  35,372,704     17.79
                                            -----------  --------          -----------  --------
                                            142,326,804     63.57          124,094,492     62.41
                                            -----------  --------          -----------  --------
     Fixed Term Certificate Accounts
      Balances $100,000 or greater     2.85  21,228,831      9.48     3.31  19,388,917      9.75
      Balances less than $100,000      2.73  60,347,569     26.95     3.08  55,356,478     27.84
                                            -----------  --------          -----------  --------
                                             81,576,400     36.43           74,745,395     37.59
                                            -----------  --------          -----------  --------
                                            223,903,204    100.00          198,839,887    100.00
                                            ===========  ========          ===========  ========
</TABLE>
     The contractual  maturity of certificate accounts at September 30, 2003 and
     December 31, 2002, is as follows:

      Period Ending September 30, 2003            Year Ending December 31, 2002
      --------------------------------            -----------------------------
         2003              9,531,950                2003            49,359,359
         2004             40,973,417                2004            11,390,081
         2005             19,125,696                2005            11,253,040
         2006              5,582,849                2006               737,993
         2007 and After    6,362,488                2007 and After   2,004,922
                          ----------                                ----------
                          81,576,400                                74,745,395
                          ==========                                ==========

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

     Advances  from  FHLB  are  summarized  as  follows  for the  periods  ended
     September 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)        1,217,301        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.

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

     The amortized cost and fair value of investment securities held-to-maturity
     and  available-for-sale at September 30, 2003, by contractual maturity, are
     as follows.  Expected  maturities will differ from  contractual  maturities
     because  issuers may have the right to call or prepay  obligations  without
     call or prepayment penalties.

                                       12
<PAGE>
<TABLE>
<CAPTION>
                                                             Gross       Gross     Estimated
                                             Amortized    Unrealized  Unrealized     Market
                                               Cost          Gains      Losses        Value
                                             ----------     -------    ----------  -----------
<S>                                          <C>          <C>          <C>          <C>
     Available-for-Sale:
          United States Government
            Agency Securities Maturing:
               Within one year                3,551,089       5,457           --     3,556,546
               After one year
                 but within five years        1,026,951      10,859           --     1,037,810

          Mortgage Backed Securities:
              After one year
                 but within five years        2,593,323      32,484          872     2,624,935
              After five years
                 but within ten years         2,699,673          --       54,113     2,645,560

              Municipal Securities Maturing:
               Within one year                  130,000       1,957           --       131,957
               After one year
                 but within five years        1,098,744      68,293           --     1,167,037
               After five years
                 but within ten years         4,483,811     193,222           --     4,677,033
               After ten years
                 but within fifteen years     9,707,201     461,849           --    10,169,050
               After fifteen years
                 but within twenty years      3,698,939     141,082           --     3,840,021
               After 20 years                 2,025,511       9,786       60,877     1,974,420

         Corporate Securities Maturing:
               After one year
                 but within five years        1,376,976      35,635           --     1,412,611
               After five years
                 but within ten years         4,504,142      77,008           --     4,581,150
               After ten years
                 but within fifteen years     2,100,000      13,915           --     2,113,915
               After twenty years             1,729,991     114,975           --     1,844,966

          Equity Securities
                Callable within one year     21,053,106     249,394    1,770,000    19,532,500
                Callable after one year
                  but within five years       4,419,206     130,000       13,339     4,535,867
                Callable after five years
                  but within ten years        1,000,000      35,400           --     1,035,400

          Other
               After 20 years                   318,155       6,055           --       324,210
                                             ----------   ---------    ---------   -----------
                  Total Available-for-Sale   67,516,818   1,587,371    1,899,201    67,204,988
                                             ==========   =========    =========   ===========
     Held-to-Maturity:
          United States Government
            Agency Securities Maturing:
                After one year
                 but within five years        2,000,000          --           --     2,000,000
                After five years
                 but within ten years         4,976,930          --      110,088     4,866,842

          Mortgage Backed Securities:
               After five years
                 but within ten years         4,839,437       6,990       18,614     4,827,813
               After ten years
                 but within fifteen years     5,229,928      18,046        7,433     5,240,541
               After twenty years               996,087          --       26,344       969,743

          Municipal Securities Maturing:
               After five years
                 but within ten years           570,475         211           --       570,686
               After ten years
                 but within fifteen years       429,979          --           --       429,979
               After twenty years             1,156,499          --       11,699     1,144,800
          Corporate Securities Maturing:
               After one year
                 but within five years        2,339,518      43,999        1,980     2,381,537
               After five years
                 but within ten years         1,098,362      20,888        5,318     1,113,932
               After twenty years             3,707,193     163,616       19,316     3,851,493
                                             ----------     -------    ---------   -----------
                  Total Held-to-Maturity     27,344,408     253,750      200,792    27,397,366
                                             ==========     =======    =========   ===========
</TABLE>
                                       13
<PAGE>
NOTE 11     EARNINGS PER SHARE
-------     ------------------

     Earnings  per share for three months and nine months  ended  September  30,
     2003, compared with the same period in 2002, are as follows:
<TABLE>
<CAPTION>
                                                     Three Months Ended        Nine Months Ended
                                                        September 30,             September 30,
                                                      2003        2002          2003        2002
                                                   ---------   ---------    ----------   ----------
<S>                                                <C>         <C>           <C>         <C>
Net Income                                           669,096     975,944     2,114,794   2,443,809

Average Basic Shares Outstanding                   1,391,545   1,381,397     1,387,058   1,380,356

Basic Earnings Per Share                                 .48         .71          1.52        1.77
                                                   =========   =========     =========   =========

Net Income                                           669,096     975,944     2,114,794   2,443,809

Average Basic Shares Outstanding                   1,391,545   1,381,397     1,387,058   1,380,356
Dilutive Effect Due to Stock Options                 116,619      94,126       101,789      93,213
                                                   ---------   ---------     ---------   ---------
Average Shares Outstanding, as Adjusted            1,508,164   1,475,523     1,488,847   1,473,569

Diluted Earnings Per Share                               .44        0.66          1.42        1.66
                                                   =========   =========     =========   =========
</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") represents virtually all of the assets of the Company.
     The Company  places an emphasis  on an  integrated  approach to its balance
     sheet  management.  Significant  balance  sheet  components  of  investment
     securities,  loans and sources of funds are managed in an integrated manner
     with the management of interest rate risk,  liquidity,  and capital.  These
     components are examined below.

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

     At  September  30,  2003,  assets  of  the  Company  totaled  $294  million
     reflecting an increase of $26 million or 10% since  December 31, 2002.  The
     growth in assets has been funded  primarily by a $25.1 million  increase in
     deposits.

     LOANS
     -----

     Loans  outstanding  totaled  $150.3  million at September 30, 2003 compared
     with $160.4 million at December 31, 2002.  First  mortgage loans  decreased
     $6.1  million,   consumer  loans  declined  $409,000,  and  commercial  and
     construction  loans  declined  $2.9  million.  The  loan  portfolio  mix at
     September 30, 2003 consists of 34% residential  mortgages,  43% commercial,
     14% real estate construction, and 9% consumer loans.

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

     Investment  securities  totaled $94.6  million at September  30, 2003.  The
     investment  portfolio  at quarter end  consisted  of $11.6  million in debt
     securities issued by the U.S. Government or Federal Agencies, $16.3 million
     in mortgage backed securities, $24.1 million in securities issued by state,
     county, or  municipalities,  $17.1 million in corporate  securities,  $25.1
     million in  preferred  stock  issued by Federal  Agencies,  and $324,000 in
     other equity securities.

     At September 30, 2003, securities categorized as available-for-sale totaled
     $67.2 million while the  held-to-maturity  securities totaled $27.3 million
     compared  to  $62  million  in  available-for-sale  and  $15.7  million  in
     held-to-maturity   at  December  31,  2002.  At  September  30,  2003,  the
     available-for-sale  portfolio had net  unrealized  losses of $311,830 while
     our held-to-maturity securities had $52,958 in net unrealized gains.

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

     At  September  30, 2003 the  Company had  nonaccrual  loans  totaling  $3.8
     million  compared  with $1.1 million at December 31, 2002.  The reserve for
     loan and lease losses was  $1,883,329  at September  30, 2003,  or 1.28% 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  September 30, 2003  of $223.9  million,  reflected  an
     increase of $25.1 million or a 13% increase from $198.8 million at December
     31, 2002.  Noninterest  bearing  demand  deposits  totaled $12.4 million at
     September  30, 2003,  an increase of $1.1  million from  December 31, 2002.
     Interest  bearing  deposits  increased  $24.0 million to $211.4  million at
     September 30, 2003.

     CAPITAL
     -------

     Tier 1  capital  for the  Savings  Bank at  September  30,  2003 was  $22.1
     million.  At September 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 11.39%, 12.21% and 7.66%, respectively.

     Tier 1 capital for the Company at  September  30, 2003,  was $31.7  million
     with Tier 1, total risk-based,  and leverage ratios of 16.27%,  17.26%, and
     10.86%, 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 September
     30, 2003.

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

     The  Company  had net  income  of  $669,096  for the  three  months  ending
     September  30, 2003,  compared with $975,944 for the same period last year,
     resulting in a decrease of 31%. For the nine months  ending  September  30,
     2003,  net income was  $2,114,794  compared  with  $2,443,809  for the same
     period in 2002.  Return on average  assets and average equity was 1.02% and
     12.25%,  respectively,  compared  with  1.26% and 16.62% for the nine month
     period ended  September 30, 2002.  For the nine months ended  September 30,
     2003, net income per diluted share was $1.42 compared to earnings per share
     of $1.66 for the same period in 2002.

     Noninterest income increased $432,341, or 40%, during the nine months ended
     September  30,  2003,  compared  the same  period  last year as a result of
     increases  in other fees and service  charges,  gains on loans  sold,  real
     estate sales commission,  and insurance  commissions.  Partially offsetting
     the  increases  were  declines  in  rental  income  and  realized  gains on
     securities. Areas contributing significantly to the increase in noninterest
     income included  increases in real estate sales commission income and gains
     on loans sold which 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 $3,903,507 for the nine months ending September 30,
     2003, a decrease of $329,015, or 14% 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 data processing expense.

                                       15
<PAGE>

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

     Interest income and interest  expense both decreased from 2002 to 2003 as a
     result of  declining  yields on loans and  investments;  consequently,  net
     interest  income of $5,642,521 for the nine months ended September 30, 2003
     reflects a decrease of $818,462 or 13% under the same period last year. For
     the nine months ending September 30, 2003, average earning assets increased
     $17.8  million or 7% and average  interest  bearing  liabilities  increased
     $15.4  million,  or 7%,  compared with the same period in 2002. The taxable
     equivalent  yield on earning  assets  declined 1.34% to 6.90% for the first
     nine months of 2003 compared with the same period in 2002 while the cost on
     interest   bearing   liabilities   declined  65  basis   points  to  2.74%.
     Consequently,  the taxable  equivalent net interest margin based on average
     earning assets  decreased to 3.07% for the nine months ending September 30,
     2003 compared with 3.80% for the same period in 2002.

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

     During the nine months ended September 30, 2003, the provision for possible
     loan losses was $392,362  compared  with  $402,500 for the same period last
     year. There were $72,353 in loan or lease charge-offs net of recoveries for
     the nine months ended September 30, 2003, compared with $469,039 during the
     same period in 2002.  The allowance  for possible  loan losses  represented
     1.28% of total loans, net of mortgage loans held-for-sale, at September 30,
     2003,  compared to .89% at September  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 nine months ended September 30, 2003, the provision for federal and
     state income taxes were  $742,105,  an increase of $188,694 from 2002.  The
     increase  is due to a decline in tax  exempt  income  compared  to the same
     period in 2002.

     NONTEREST INCOME
     ------------------

     The  Company's  noninterest  income was  $1,510,247  during the nine months
     ended  September  30,  2003,  an  increase  of  $432,341  or 40%  from  the
     comparable 2002 period.  During 2003, other fees and service  charges,  net
     gain on loans sold, real estate sales commissions, and insurance commission
     income increased $68,457,  $506,864,  $110,539, and $14,115,  respectively.
     Partially  offsetting  the increases in  noninterest  income was a $255,298
     decline in  realized  gain on  securities  and a $12,336  decline in rental
     income.

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

     Noninterest  expense  totaled  $3,903,507  for the nine month period ending
     September  30, 2003, a decrease of $235,662 or 6%. The decrease was the net
     result of a $74,862 decrease in furniture and equipment  expense, a $15,295
     decrease in advertising expense, and a $416,976 decrease in other operating
     expenses  combined with increases in compensation  and benefits,  occupancy
     expense,  and data processing  expense of $194,817,  $53,475,  and $23,179,
     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

            None


ITEM 5.    OTHER INFORMATION

            None


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

         (a)   Exhibits

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

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

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

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

         (b)   The Company did not file any reports on Form 8-K during the
               quarter ended September 30, 2003.

                                      17


<PAGE>



                                   SIGNATURES


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





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





    November 13, 2003                        /s/  Randal R. Greene
---------------------------                  ----------------------------------
         (Date)                               Randal R. Greene, President





    November 13, 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)











                                       18