SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

Mark One

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

     For the quarterly period ended September 30, 2001.

                                       OR

[    ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                         Commission File Number: 0-23551

                        UNITED TENNESSEE BANKSHARES, INC.
        (Exact Name of Small Business Issuer as Specified in its Charter)


            TENNESSEE                                  62-1710108
----------------------------------                 ------------------
(State or Other Jurisdiction of                      (I.R.S. Employer
Incorporation or Organization)                        Identification No.)


  344 Broadway, Newport, Tennessee                        37821
------------------------------------                   -----------
(Address of Principal Executive Offices)               (Zip Code)

         Issuer's Telephone Number, Including Area Code: (423) 623-6088


Check  whether  the issuer:  (1) has 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 ninety days:

                                 Yes [X] No [ ]

State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date: 1,343,926
                                         ---------

Transitional Small Business Disclosure Format (Check one):     Yes [  ]   No [X]


<PAGE>
<TABLE>
<CAPTION>
                                    CONTENTS

                                                                                                              PAGE NO.
                                                                                                              --------
PART I.  FINANCIAL INFORMATION
         ---------------------
<S>                                                                                                           <C>
         Item 1.  Financial Statements

                  Consolidated Statements of Financial Condition as of
                  September 30, 2001 (Unaudited) and December 31, 2000                                           3

                  Consolidated Statements of Income for the Three-Month and
                  Nine-Month Periods Ended September 30, 2001 and 2000 (Unaudited)                               4

                  Consolidated Statements of Comprehensive Income for the
                  Three-Month and Nine-Month Periods Ended September 30, 2001
                  and 2000 (Unaudited)                                                                           5

                  Consolidated Statement of Changes in Shareholders' Equity for the
                  Nine-Month Period Ended September 30, 2001 (Unaudited)                                         6

                  Consolidated Statements of Cash Flows for the Nine-Month Periods
                  Ended September 30, 2001 and 2000 (Unaudited)                                                7-8

                  Notes to Consolidated Financial Statements for the Nine-Month
                  Periods Ended September 30, 2001 and 2000 (Unaudited)                                       9-11

         Item 2.  Management's Discussion and Analysis or Plan of Operation                                  12-17


PART II.  OTHER INFORMATION
          -----------------

         Item 1.  Legal Proceedings                                                                             18

         Item 2.  Changes in Securities and Use of Proceeds                                                     18

         Item 3.  Defaults upon Senior Securities                                                               18

         Item 4.  Submission of Matters to a Vote of Security Holders                                           18

         Item 5.  Other Information                                                                             18

         Item 6.  Exhibits and Reports on Form 8-K                                                              18

SIGNATURES                                                                                                      19
</TABLE>

                                       2

<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                 AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
<TABLE>
<CAPTION>
                                                                               September 30,
                                                                                    2001             December 31,
                                                                                (Unaudited)              2000
                                                                            ------------------------------------------
                                                                                         (In thousands)
                       Assets
<S>                                                                                   <C>                  <C>
Cash and amounts due from depository institutions                                     $    5,305           $    3,067
Investment securities available for sale, at fair value                                   23,260               24,357
Loans receivable, net                                                                     71,531               68,878
Premises and equipment, net                                                                  508                  470
Foreclosed real estate - held for sale                                                        76                    0
Accrued interest receivable                                                                  606                  603
Goodwill, net of amortization                                                                973                1,033
Prepaid expenses and other assets                                                             39                  145
                                                                            ------------------------------------------
         Total assets                                                                $   102,298          $    98,553
                                                                            ==========================================
               Liabilities and Equity

Liabilities:
 Deposits                                                                            $    86,379          $    81,614
 Advances from Federal Home Loan Bank                                                        178                1,753
 Accrued interest payable                                                                    173                  300
 Deferred income taxes                                                                       996                  841
 Accrued benefit plan liabilities                                                            610                  643
 Other liabilities                                                                            51                   72
                                                                            ------------------------------------------
         Total liabilities                                                                88,387               85,223
                                                                            ------------------------------------------

Shareholders' equity:
 Common stock - no par value; authorized 20,000,000 shares;
   issued and outstanding 1,343,926 shares (1,382,013 in 2000)                            12,746               13,091
 Unearned compensation - ESOP                                                              ( 678)               ( 843)
 Shares in grantor trust - contra account                                                  ( 183)               ( 183)
 Shares in MRP plan - contra account                                                       ( 210)               ( 390)
 Shares in stock option plan trusts - contra account                                     ( 1,657)             ( 1,657)
 Retained earnings                                                                         2,467                2,139
 Accumulated other comprehensive income                                                    1,426                1,173
                                                                            ------------------------------------------
  Total shareholders' equity                                                              13,911               13,330
                                                                            ------------------------------------------

Total liabilities and equity                                                         $   102,298          $    98,553
                                                                            ==========================================
</TABLE>





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

                                       3
<PAGE>



                UNITED TENNESSEE BANKSHARES, INC., AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
     FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
<TABLE>
<CAPTION>
                                                                      (In Thousands Except                (In Thousands Except
                                                                     per Share Information)              per Share Information)
                                                               -----------------------------------  --------------------------------
                                                                       Three Months Ended                  Nine Months Ended
                                                                         September 30,                       September 30,
                                                               -----------------------------------  --------------------------------
                                                                    2001               2000              2001              2000
                                                                 (Unaudited)        (Unaudited)       (Unaudited)      (Unaudited)
                                                               ----------------   ----------------  ----------------  --------------
Interest income:
<S>                                                                  <C>                <C>               <C>               <C>
 Loans                                                               $   1,469          $   1,382         $   4,428        $  4,003
 Investment securities                                                     335                393             1,054           1,232
 Other interest-earning assets                                              28                 33                83              86
                                                               ----------------   ----------------  ----------------  -------------
  Total interest income                                                  1,832              1,808             5,565           5,321
                                                               ----------------   ----------------  ----------------  -------------
Interest expense:
 Deposits                                                                  884                966             2,866           2,699
 Advances from Federal Home Loan Bank and note
  payable                                                                    7                 81                38             257
                                                               ----------------   ----------------  ----------------  -------------
  Total interest expense                                                   891              1,047             2,904           2,956
                                                               ----------------   ----------------  ----------------  -------------
Net interest income                                                        941                761             2,661           2,365

Provision for loan losses                                                   19                  9                47              25
                                                               ----------------   ----------------  ----------------  -------------
Net interest income after provision for loan losses                        922                752             2,614           2,340
                                                               ----------------   ----------------  ----------------  -------------
Noninterest income:
 Deposit account service charges                                            57                 46               180             138
 Loan service charges and fees                                              28                 27                89              84
 Net gain (loss) on sales of investment
  securities available for sale                                              0                  0                 3              (9)
 Other                                                                      10                  4                31              18
                                                               ----------------   ----------------  ----------------  -------------
  Total noninterest income                                                  95                 77               303             231
                                                               ----------------   ----------------  ----------------  -------------
Noninterest expense:
 Compensation and benefits                                                 288                268               876             796
 Occupancy and equipment                                                    54                 62               156             163
 Federal deposit insurance premiums                                         12                 12                36              36
 Data processing fees                                                       64                 65               174             161
 Advertising and promotion                                                  23                 18                70              52
 Amortization                                                                                                    60              60
                                                                            20                 20
 Other                                                                     107                112               375             377
                                                               ----------------   ----------------  ----------------  -------------
  Total noninterest expense                                                568                557             1,747           1,645
                                                               ----------------   ----------------  ----------------  -------------
Income before income taxes                                                 449                272             1,170             926

Income taxes                                                               168                 49               428             300
                                                               ----------------   ----------------  ----------------  -------------
Net income                                                            $    281           $    223          $    742        $    626
                                                               ================   ================  ================  =============
Earnings per share:
 Basic                                                                $   0.21          $    0.16          $   0.54        $   0.45
                                                               ================   ================  ================  =============
 Diluted                                                              $   0.21          $    0.16          $   0.54        $   0.45
                                                               ================   ================  ================  =============
</TABLE>
     The accompanying notes are an integral part of these financial statements.

                                       4
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
     FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000






<TABLE>
<CAPTION>
                                                                Three Months Ended                  Nine Months Ended
                                                                  September 30,                       September 30,
                                                              2001             2000              2001               2000
                                                         ---------------  ----------------  ----------------   ----------------
                                                            (Unaudited - in Thousands)          (Unaudited - in Thousands)
                                                         ---------------------------------  -----------------------------------
<S>                                                            <C>                <C>              <C>                <C>
Net income                                                     $    281           $   223          $    742           $    626
                                                         ---------------  ----------------  ----------------   ----------------

Other comprehensive income (loss), net of tax:
 Unrealized gains (losses) on investment securities                 229               566               411                371
 Less reclassification adjustment for gains\losses
  included in net income                                              0                 0               (3)                  9
 Less income taxes related to unrealized
  gains\losses on investment securities                            (87)             (215)             (155)              (145)
                                                         ---------------  ----------------  ----------------   ----------------
   Other comprehensive income (loss), net of tax                    142               351               253                235
                                                         ---------------  ----------------  ----------------   ----------------

Comprehensive income                                            $   423           $   574          $    995           $    861
                                                         ===============  ================  ================   ================
</TABLE>




















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

                                       5
<PAGE>



                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
               FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001





<TABLE>
<CAPTION>
                                                         Shares in    Shares in   Shares in               Accumulated
                                            Unearned      Grantor     MPR Plan-   Stock Option               Other         Total
                                Common    Compensation  Trust-Contra    Contra    Plan-Contra  Retained  Comprehensive  Shareholders
                                 Stock         ESOP        Account      Account     Account     Earnings     Income          Equity
                               ----------- ------------- ------------- ---------- ------------  --------- -------------- -----------
                                                                    (Unaudited - in Thousands)
                               -----------------------------------------------------------------------------------------------------
<S>                               <C>        <C>           <C>          <C>        <C>           <C>        <C>           <C>
Balances, beginning of period     $13,091    $    (843)    $    (183)   $  (390)   $  (1,657)    $ 2,139    $    1,173    $  13,330

Net income                              0             0             0          0            0        742              0         742

Issuance of shares of common
stock
 pursuant to MRP plan                   0             0             0        180            0          0              0         180

Other comprehensive income
(loss)                                  0             0             0          0            0          0            253         253

Payment on ESOP loan principal          0           165             0          0            0          0              0         165

Dividends paid                          0             0             0          0            0      (414)              0        (414)

Retirement of 38,087 shares
of
 common stock                        (345)            0             0          0            0          0              0        (345)
                               ----------- ------------- ------------- ---------- ------------  --------- -------------- -----------
Balances, end of period           $12,746    $     (678)    $    (183)   $  (210)   $  (1,657)     2,467     $    1,426   $  13,911
                               =========== ============= ============= ========== ============  ========= ============== ===========
</TABLE>



















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

                                       6
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
          FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                                     Nine Months Ended
                                                                                                       September 30
                                                                                         ------------------------------------------
                                                                                                2001                  2000
                                                                                         --------------------  --------------------
                                                                                                (Unaudited - in Thousands)
Operating Activities:
<S>                                                                                                <C>                   <C>
 Net income                                                                                        $     742             $     626
                                                                                         --------------------  --------------------
 Adjustments  to  reconcile  net  income  to  net  cash  provided  by  operating
  activities:
   Provision for loan losses                                                                              47                    25
   Depreciation                                                                                           47                    43
   Amortization of goodwill                                                                               60                    60
   Net (gain) loss on sales of foreclosed real estate                                                      0                    10
   Federal home loan bank stock dividends                                                                (44)                  (41)
   Net (gain) loss on sales of investment securities
    available for sale                                                                                    (3)                    9
   Deferred income taxes (benefit)                                                                         0                   (47)
   (Increase) Decrease in:
    Accrued interest receivable                                                                          (12)                 (105)
    Other assets                                                                                         105                    45
   Increase (Decrease) in:
    Accrued interest payable                                                                            (127)                    1
    Accrued income taxes                                                                                   0                     0
    Accrued benefit plan liabilities                                                                     (33)                  (22)
    Other liabilities                                                                                    (21)                  (46)
                                                                                         --------------------  --------------------
     Total adjustments                                                                                    19                   (68)
                                                                                         --------------------  --------------------
Net cash provided by operating activities                                                                761                   558
                                                                                         --------------------  --------------------

Investing Activities:
 Purchases of investment securities available for sale                                                (6,500)               (2,474)
 Proceeds from maturities of investment securities
  available for sale                                                                                   3,320                     0
 Principal payments received on investment securities
  available for sale                                                                                   4,230                 4,240
 Proceeds from sales of investment securities
  available for sale                                                                                     502                 1,493
 Net increase in loans                                                                                (2,766)               (5,305)
 Purchases of plant and equipment, net                                                                   (85)                  (14)
 Proceeds from sales of foreclosed real estate                                                             0                     0
                                                                                         --------------------  --------------------
Net cash used in investing activities                                                                 (1,299)               (2,060)
                                                                                         --------------------  --------------------
</TABLE>






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

                                       7
<PAGE>



                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
          FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
<TABLE>
<CAPTION>
                                                                                                     Nine Months Ended
                                                                                                       September 30,
                                                                                         ------------------------------------------
                                                                                                2001                  2000
                                                                                         --------------------  --------------------
                                                                                                (Unaudited - in Thousands)
Financing Activities:
<S>                                                                                                    <C>                   <C>
 Net increase (decrease) in deposits                                                                   4,765                 5,668
 Dividends paid                                                                                         (414)                 (414)
 Purchase of common stock                                                                               (345)                    0
 Issuance of common stock for MRP plan                                                                   180                   155
 Payment on ESOP loan and release of shares                                                              165                   162
 Repayment of advances from Federal Home Loan Bank                                                    (1,575)               (1,469)
 Repayment of note payable                                                                                 0                (3,200)
 Proceeds from advances from Federal Home Loan Bank                                                        0                 3,000
                                                                                         --------------------  --------------------
Net cash provided by (used in) financing activities                                                    2,776                 3,902
                                                                                         --------------------  --------------------
Net increase (decrease) in cash and cash equivalents                                                   2,238                 2,400

Cash and cash equivalents, beginning of period                                                         3,067                 2,387
                                                                                         --------------------  --------------------
Cash and cash equivalents, end of period                                                          $    5,305            $    4,787
                                                                                         ====================  ====================
Supplementary disclosures of cash flow information:
 Cash paid during the period for:
 Interest                                                                                             $3,031                $2,955
 Income taxes                                                                                           $283                  $344

Supplementary disclosures of noncash investing activities:
  Sale of foreclosed real estate
    by origination of mortgage loans                                                                     $59                   $75
  Acquisition of foreclosed real estate                                                                 $135                   $85
  Change in unrealized gain\loss on investment securities
   available for sale                                                                                   $408                  $380
  Change in deferred income taxes associated with
   unrealized gain\loss on investment securities available for sale                                     $155                  $145
  Change in net unrealized gain\loss on investment
   securities available for sale                                                                        $253                  $235
</TABLE>








     The accompanying notes are an integral part of these financial statements

                                       8
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
                                   (UNAUDITED)



Note 1 - Basis of Presentation and Principles of Consolidation

United Tennessee Bankshares, Inc. ("Company") was incorporated under the laws of
the State of  Tennessee  for the  purpose of  becoming  the  holding  company of
Newport Federal Savings and Loan Association ("Association"), in connection with
the Association's  conversion from a federally chartered mutual savings and loan
association to a federally chartered capital stock savings bank. The Company had
no assets or  operations  prior to the  conversion.  On  January  1,  1998,  the
Association  converted  from a mutual  savings  association  to a capital  stock
savings  bank,  changed  its name to  Newport  Federal  Bank  ("Bank"),  and was
simultaneously  acquired by its holding company,  United  Tennessee  Bankshares,
Inc. See Note 3 for additional  information  concerning the Association's  stock
conversion.

The Bank provides a variety of financial  services to individuals  and corporate
customers  through its three offices in Newport,  Tennessee.  The Bank's primary
deposit  products are  interest-bearing  savings  accounts and  certificates  of
deposit.  The Bank's  primary  lending  products  are  one-to-four  family first
mortgage loans.

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-QSB and on the same basis as the
Company's  audited  consolidated   financial  statements.   In  the  opinion  of
management, all adjustments,  consisting of normal recurring accruals, necessary
to present fairly the financial position,  results of operations, and cash flows
for the interim periods presented have been included.  The results of operations
for such interim periods are not necessarily  indicative of the results expected
for the full year.

The consolidated  financial  statements  include the accounts of the Company and
the Bank. All intercompany accounts have been eliminated.

Note 2 - Earnings Per Share

Basic earnings per share represents income available to shareholders  divided by
the weighted  average number of shares  outstanding  during the period.  Diluted
earnings per share reflects  additional  shares that would have been outstanding
if dilutive  potential  shares had been  issued,  as well as any  adjustment  to
income that would result from the assumed issuance. Potential shares that may be
issued by the  Company  relate  solely to  outstanding  stock  options,  and are
determined using the treasury stock method.

Earning per share have been computed based on the following:
<TABLE>
<CAPTION>
                                                       Three Months Ended               Nine Months Ended
                                                 --------------------------------  ----------------------------
                                                          September 30,                   September 30,
                                                 --------------------------------  ----------------------------
                                                      2001            2000             2001          2000
                                                 --------------- ----------------  ------------- --------------
<S>                                                    <C>             <C>             <C>           <C>
Average number of shares outstanding                   1,344,227       1,382,013       1,369,545     1,382,013
Effect of dilutive options                                   738           2,364             567         2,364
                                                 --------------- ----------------  ------------- --------------
Average number of shares outstanding used
   to calculate earnings per share                     1,344,965       1,384,377       1,370,112     1,384,377
                                                 =============== ================  ============= ==============
</TABLE>


                                       9
<PAGE>


Note 3 - Comprehensive Income

The FASB has  issued  SFAS  No.  130,  "Reporting  Comprehensive  Income."  This
statement  establishes  standards  for  reporting  comprehensive  income and its
components  in the  financial  statements.  The objective of the statement is to
report a measure of all changes in equity of an  enterprise  that  results  from
transactions  and other  economic  events of the period other than  transactions
with owners. Items included in comprehensive income include revenues, gains, and
losses that under generally accepted accounting  principles are directly charged
to equity.  Examples include foreign currency  translations,  pension  liability
adjustments and unrealized gains and losses on investment  securities  available
for sale.  The  Company  has  included  its  comprehensive  income in a separate
financial statement as part of its consolidated financial statements.


Note 4 - Management Recognition Plan

In  January  1999,  the  Company's  board of  directors  approved  a  Management
Recognition Plan (MRP), and in May 1999, the Company's shareholders ratified the
plan. The plan authorizes the board of directors to award up to 58,190 shares of
restricted  common  stock to  members  of the  board  of  directors  and  senior
management.

The Company's  board of directors has awarded  54,518 shares as of September 30,
2001 (50,845  shares as of September  30,  2000) of  restricted  common stock to
certain members of the board of directors and senior management.  The shares are
awarded 25% per year. The Company and its subsidiary  will share the cost of the
Plan and accrue the  estimated  cost of  repurchasing  shares to be  reissued as
restricted stock over the period that such awards are earned.

Activity in the MRP plan is as follows:
<TABLE>
<CAPTION>

                                                                                                       Nine Month
                                                                                               Period Ended September 30,
                                                                                           ------------------------------------
                                                                                                2001                2000
                                                                                           ---------------     ----------------
<S>                                                                                     <C>                 <C>
         Accrued Liability Balance at Beginning of Period                               $         152,895   $          142,595
         Amount Charged to Expense                                                                125,531              119,194
         Less Cost of Shares Issued                                                             (180,124)            (155,558)
                                                                                           ---------------     ----------------
         Accrued Liability Balance at End of Period                                     $          98,302   $          106,231
                                                                                           ===============     ================
</TABLE>

The Company  held 17,138  shares as of September  30, 2001 (32,772  shares as of
September 30, 2000) of its common stock in trust at a net cost of $209,770 as of
September 30, 2001 ($400,915 as of September 30, 2000). A contra-equity  account
has been established to reflect the cost of such shares held in trust.


Note 5 - Stock Option Plan

In January 1999,  the Company's  board of directors  approved the Company's 1999
stock option plan,  and in May 1999,  the  Company's  shareholders  ratified the
plan.  The plan  reserved  145,475  shares  of the  Company's  common  stock for
issuance  pursuant  to the options to be  granted.  These  shares will be either
newly issued shares or shares purchased on the open market.

The  Company's  board of directors  has  approved the issuance of stock  options
under  the  Plan to  certain  members  of the  board  of  directors  and  senior
management. The options vest at a rate of 25% per year, expire in ten years, and
provide for the purchase of stock at an exercise price of $8.60 per share. Stock
options  awarded  totaled  209,299 and 205,869 as of September 30, 2001 and 2000
respectively.

The Company has  repurchased  188,422  shares as of September  30, 2001 (184,527
shares as of September  30, 2000) of its common  stock,  which are being held in
trusts for when the stock options are  exercised.  A  contra-equity  account has
been established to reflect the costs of such shares held in trusts. The Company
intends to utilize  dividends  received to  continue  to purchase  shares of its
common stock to be placed in the stock option trusts.

                                       10
<PAGE>



The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plan.  Accordingly,  no compensation  cost has been recognized.
Had compensation  cost for the Company's stock option plan been determined based
on the fair value at the grant dates for awards under the plan  consistent  with
the method  prescribed  by FASB  Statement No. 123, the Company's net income and
earnings per share would not have been significantly affected.


Note 6 - Improvement Plan for Main Office Facility

The  Company's  board of  directors  recently  approved  a plan to  improve  the
existing  main office  facilities.  Total cost of the project is estimated to be
approximately $1,000,000.


Note 7 - Accounting for Transfers and Servicing of Financial Assets and
         Extinguishment of Liabilities

In September 2000, the FASB issued Statement of Financial  Accounting  Standards
No.  140,  Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishment of Liabilities.  This Statement  replaces FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.  It revises the standards for  accounting  for  securitization  and
other  transfers  of  financial  assets  and  collateral  and  requires  certain
disclosures,  but it carries over most of Statement  No. 125's  provisions.  The
Statement  provides   accounting  and  reporting  standards  for  transfers  and
servicing of financial assets and extinguishment of liabilities  occurring after
March  31,  2001.   This  Statement  is  also  effective  for   recognition  and
reclassification  of collateral  and for  disclosure  related to  securitization
transactions  and  collateral  for fiscal years ending after  December 15, 2000.
Since  the  Company  does not  currently  engage  in  securitization  and  other
transfers of financial assets and collateral,  this Statement is not expected to
significantly  affect the  financial  condition or results of  operations of the
Company.

In June 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting Standard No. 141, Business  Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method
of accounting  be used for all business  combinations  initiated  after June 30,
2001.  SFAS  142  requires  that  goodwill  and  other  intangible  assets  with
indefinite  useful  lives no longer be  amortized,  but  instead  be tested  for
impairment  annually.  The  Company is  required  to  implement  SFAS No. 142 on
January 1, 2002.  However,  the Company does not expect that this statement will
have an impact on its consolidated financial position or results of operations.



                                       11
<PAGE>


Item 2.  Management's Discussion and Analysis or Plan of Operation


General

The principal business of United Tennessee Bankshares, Inc. and our wholly owned
subsidiary  Newport  Federal  Bank  ("we,"  "us," etc.)  consists  of  accepting
deposits from the general  public through our main office and two branch offices
and investing  those funds in loans secured by one- to  four-family  residential
properties  located in our primary  market area. We also maintain a portfolio of
investment  securities and originate a limited amount of commercial  real estate
loans and consumer loans. Our investment  securities  portfolio consists of U.S.
Treasury notes and U.S. government agency securities,  local municipal bonds and
mortgage-backed  securities  that are guaranteed as to principal and interest by
the FHLMC,  GNMA or FNMA.  We also  maintain an  investment in Federal Home Loan
Bank of Cincinnati common stock and FHLMC preferred stock.

Our net  income  primarily  depends  on our net  interest  income,  which is the
difference between interest income earned on loans and investment securities and
interest paid on  customers'  deposits and other  borrowings.  Our net income is
also  affected by  noninterest  income,  such as service  charges on  customers'
deposit accounts,  loan service charges and other fees, and noninterest expense,
primarily  consisting  of  compensation  expense,  deposit  insurance  and other
expenses incidental to our operations.

Our  operations  and those of the thrift  industry as a whole are  significantly
affected by prevailing  economic  conditions,  competition  and the monetary and
fiscal policies of governmental  agencies. Our lending activities are influenced
by demand for and supply of housing and competition  among lenders and the level
of interest  rates in our market area.  Our deposit flows and costs of funds are
influenced  by  prevailing  market  rates of  interest,  primarily  on competing
investments, account maturities and the levels of personal income and savings in
our market area.

The following is a discussion of our financial condition as of and for the three
and nine-month  periods ended September 30, 2001.  These comments should be read
in conjunction  with our  consolidated  financial  statements  and  accompanying
footnotes appearing in this report.

This  report  contains   "forward-looking   statements"   relating  to,  without
limitation,  future economic performance,  plans and objective of management for
future  operations,  and  projections of revenues and other financial items that
are based on the  beliefs  of  management,  as well as  assumptions  made by and
information currently available to management. The words "expect," "anticipate,"
and  "believe,"  as  well as  similar  expressions,  are  intended  to  identify
forward-looking  statements.  Our actual results may differ  materially from the
results discussed in the forward-looking statements.



                                       12
<PAGE>



Comparison of Financial Condition at September 30, 2001 and December 31, 2000

Total assets  increased  from  December  31, 2000 to September  30, 2001 by $3.7
million,  or 3.8%,  from $98.6 million at December 31, 2000 to $102.3 million at
September  30,  2001.  The increase in assets was  principally  the result of an
increase  in  loans   receivable  and  cash  and  amounts  due  from  depository
institutions.  Cash and amounts due from  depository  institutions  increased by
$2.2  million  as a result of an  increase  in  overnight  deposits  held by the
Federal Home Loan Bank of Cincinnati.

Loans  receivable  increased  from  December 31, 2000 to  September  30, 2001 as
originations  exceeded  repayments for the period by approximately $2.6 million.
The following  table sets forth  information  about the  composition of our loan
portfolio  by type of loan at the dates  indicated.  At  September  30, 2001 and
December 31, 2000,  we had no  concentrations  of loans  exceeding  10% of gross
loans other than as disclosed below.

<TABLE>
<CAPTION>
                                                       September 30, 2001            December 31, 2000
                                                     ------------------------     -------------------------
                                                                    (Dollars in Thousands)
                                                        Amount     Percent           Amount      Percent
Type of Loan:
Real estate loans:
<S>                                                 <C>                <C>       <C>                 <C>
   One- to four-family residential                  $       55,898     74.3%     $       53,782      75.9%
   Commercial                                                9,273     12.3%             10,229      14.4%
   Construction                                              4,713      6.3%              2,589       3.6%

Consumer loans:
   Automobile                                                1,298      1.7%              1,402       2.0%
   Loans to depositors, secured by deposits                  1,238      1.6%              1,250       1.8%
   Home equity and second mortgage                             178      0.3%                227       0.3%
   Other                                                     2,621      3.5%              1,415       2.0%
                                                     ------------------------     -------------------------
                                                            75,219      100%             70,894       100%
                                                     -------------===========     -------------============

Less:
   Loans in process                                          2,627                        1,030
   Deferred fees and discounts                                 363                          326
   Allowance for loan losses                                   698                          660
                                                     --------------               --------------
     Total                                          $       71,531               $       68,878
                                                     --------------               --------------
</TABLE>

We  actively  monitor  our asset  quality  and charge  off loans and  properties
acquired in settlement of loans against the  allowances for losses on such loans
and such properties when  appropriate and provide  specific loss allowances when
necessary.  Although we believe we use the best  information  available  to make
determinations with respect to the allowances for losses, future adjustments may
be  necessary  if economic  conditions  differ  substantially  from the economic
conditions in the assumptions used in making the initial determinations.

                                       13
<PAGE>



The following table sets forth  information  about our allowance for loan losses
for the period indicated.
<TABLE>
<CAPTION>
                                                           Nine Months              Nine Months
                                                              Ended                    Ended
                                                          September 30,            September 30,
                                                               2001                     2000
                                                        -------------------      -------------------
                                                                      (In Thousands)
<S>                                                    <C>                      <C>
Balance at beginning of period                         $               660      $               661
                                                        -------------------      -------------------
Charge-offs:
Consumer                                                               (8)                     (13)
    Mortgage                                                           (1)                     (20)
Recoveries:
Consumer                                                                0                        4
Mortgage                                                                0                        0
                                                        -------------------      -------------------
Net Charge-offs                                                        (9)                     (29)
Provision for loan losses                                              47                       25
                                                        -------------------      -------------------
Balance at end of period                               $              698       $              657
                                                        ===================      ===================

The following table sets forth information about our nonperforming assets at the
dates indicated.

                                                          September 30,            September 30,
                                                               2001                     2000
                                                        -------------------      -------------------
                                                                      (In Thousands)
Nonaccrual Loans                                       $                 0      $                 0
Accruing loans which are contractually past due
90 days or more:
Real Estate:
   One- to four-family residential                                     574                      413
   Commercial                                                           43                       60
Consumer                                                                16                       20
                                                        -------------------      -------------------
Total                                                  $               633      $               493
                                                        ===================      ===================
</TABLE>
At September 30, 2001,  the Bank had two additional  commercial  loans (from the
same borrower) as to which known  information  about possible credit problems of
the  borrower  caused us to have  doubts as to the  ability of the  borrower  to
comply with present loan repayment  terms. One loan is real estate loan totaling
$467,015  and the other  loan is a letter of  credit  in the  amount of  $9,500.
Although  the real estate  loan is current,  the cash flows of the lessee of the
property  are  below  expectations.  The  letter of  credit  is  unfunded  as of
September 30, 2001. Both loans,  however,  are well secured and we do not expect
to incur any loss in  excess of  attributable  existing  reserves  on any of our
assets.  We conduct  regular  reviews of our  assets  and  evaluate  the need to
establish allowances on the basis of this review.  Allowances are established on
a  regular  basis  based on an  assessment  of risk in our  assets  taking  into
consideration the composition and quality of the portfolio,  delinquency trends,
current  charge-off  and loss  experience,  the state of the real estate market,
regulatory  reviews  conducted in the regulatory  examination  process,  general
economic  conditions  and other factors  deemed  relevant by us.  Allowances are
provided for individual assets, or portions of assets,  when ultimate collection
is considered  improbable  based on the current payment status of the assets and
the fair value or net realizable value of the collateral.

During the nine months ended  September  30,  2001,  the Company  increased  its
liabilities  by $3.2  million,  or 3.7%,  in order to fund asset  growth.  Total
deposits  increased $4.8 million or 5.8% from $81.6 million at December 31, 2000
to $86.4 million at September 30, 2001. Advances from the Federal Home Loan Bank
decreased  $1.6  million,  or 89.8%,  from $1.8  million at December 31, 2000 to
$178,000 at September 30, 2001.

                                       14
<PAGE>



Our shareholders'  equity increased  $581,000 from $13.3 million at December 31,
2000 to $13.9 million at September 30, 2001. The increase was due to $742,000 of
net  income,  payment  of  approximately  $165,000  on the ESOP loan  principal,
distribution  of shares  under the MRP plan at a cost of  $180,000,  a  $253,000
increase  in our net  unrealized  gain on  investment  securities,  payment of a
dividend to  shareholders  of $414,000,  and the  retirement of 38,087 shares of
common stock at a cost of $345,000.

Discussion  of Results of  Operations  for the Three Months Ended  September 30,
2001 and 2000

Our net income for the three months ended  September  30, 2001 was  $281,000,  a
$58,000,  or 26.0%  increase from the $223,000 we earned during the three months
ended  September  30, 2000.  Basic and diluted  earnings per share for the three
months ended  September 30, 2001 were each $0.21  compared to $0.16 for the same
period  in 2000.  Basic  average  shares  outstanding  for  three  months  ended
September  30,  2001 was  1,344,227  shares and  1,382,013  shares for the three
months ended September 30, 2000.  Average dilutive  potential shares outstanding
were 738 and 2,364, respectively.

Interest  income  increased  $24,000,  or 1.3%, from $1.81 million for the three
months  ended  September  30, 2000 to $1.83  million for the three  months ended
September  30,  2001.  The  increase in  interest  income was due to interest on
loans,  which  increased  $87,000,  or 6.3%,  due to an  increase in the average
outstanding  balance of the loan  portfolio.  The increase in interest income on
loans was  partially  offset by a  decrease  in  interest  income on  investment
securities and other interest earning assets of $58,000.

Interest  expense on deposits  decreased  $82,000  from  $966,000  for the three
months ended September 30, 2000 to $884,000 for the three months ended September
30, 2001,  primarily due to the decrease in deposit  account  interest rates. In
addition,  the Company  incurred $7,000 in interest expense on advances from the
Federal Home Loan Bank compared to $81,000 in the prior-year period.

Net  interest  income  increased  $180,000,  or 23.7%,  between the periods as a
result of the increase in interest income and the decrease in interest  expense.
The  Company's net interest  margin  widened to 3.91% for the three months ended
September  30, 2001  compared to 3.55% for the  comparable  period of 2000.  The
widening of the net interest margin reflects the current rate environment.

Noninterest  income  increased  $18,000  from $77,000 for the three months ended
September 30, 2000 to $95,000 for the three months ended September 30, 2001. The
increase in noninterest income was mainly from increased deposit account service
charges  consistent  with the higher level of deposit  accounts  during the 2001
period.

Noninterest  expenses increased $11,000 from $557,000 for the three months ended
September  30, 2000 to $568,000 for the three months ended  September  30, 2001.
Compensation and benefits expense  increased $20,000 from $268,000 for the three
months ended September 30, 2000 to $288,000 for the three months ended September
30, 2001 due to the addition of personnel and normal salary increases.

Our effective  tax rates for the three months ended  September 30, 2001 and 2000
were 37.4% and 18.0%,  respectively.  The higher  effective tax rate is due to a
decrease in our tax-exempt investment securities in 2001 compared to 2000 and an
adjustment  of our  deferred tax  liabilities  in 2000 in  accordance  with FASB
Statement No. 109, which was not necessary in 2001.


                                       15
<PAGE>



Discussion of Results of Operations for the Nine Months Ended September 30, 2001
and 2000

Our net income for the nine months ended  September  30, 2001 was  $742,000,  an
$116,000,  or 18.5%  increase over the $626,000 we earned during the nine months
ended  September  30,  2000.  Basic and diluted  earnings per share for the nine
months ended  September 30, 2001 were each $0.54  compared to $0.45 for the same
period in 2000. Basic average shares outstanding for nine months ended September
30, 2001 was  1,369,545  shares and  1,382,013  shares for the nine months ended
September 30, 2000.  Average dilutive  potential shares outstanding were 567 and
2,364, respectively.

Interest  income  increased  $244,000,  or 4.6% from $5.32  million for the nine
months  ended  September  30, 2000 to $5.57  million  for the nine months  ended
September  30,  2001.  The  increase in  interest  income was due to interest on
loans,  which increased  $425,000,  or 10.6%,  due to an increase in the average
balance of the loan  portfolio.  The  increase in  interest  income on loans was
partially  offset by a decrease in interest income on investment  securities and
other  interest  earning  assets of  $178,000  due to a decrease  in the average
balance  of  the  investment  portfolio  and a  decrease  in  the  yield  on the
investment portfolio.

Total  interest  expense for the nine months ended  September 30, 2001 decreased
$52,000  compared  to the same  period in 2000.  Interest  expense  on  deposits
increased  $167,000 due to the  increase in average  balance of deposits of $4.8
million  compared  to the same period in the prior  year.  The Company  incurred
$38,000 in interest expense on advances from the Federal Home Loan Bank compared
to  $257,000  in the  prior-year  period.  The  Company  used the funds from the
additional  deposits to fund loan  originations  and to repay  advances from the
Federal Home Loan Bank.

Net interest income increased  $296,000 or 12.5% between the periods as a result
of the  increase in interest  income and the decrease in interest  expense.  The
Company's net interest margin  increased for the nine months ended September 30,
2001 to 3.68% compared to 3.44% for the same period in 2000.

Noninterest  income  increased  $72,000 from  $231,000 for the nine months ended
September 30, 2000 to $303,000 for the nine months ended September 30, 2001. The
increase in noninterest income was mainly from increased deposit account service
charges  consistent  with the higher level of deposit  accounts  during the 2001
period.

Noninterest  expenses  increased  $102,000 from $1.6 million for the nine months
ended September 30, 2000 to $1.7 million for the nine months ended September 30,
2001.  Compensation and benefits expense increased $80,000 from $796,000 for the
nine months  ended  September  30, 2000 to  $876,000  for the nine months  ended
September 30, 2001 due to the addition of personnel and normal salary increases.
Data processing  expense and  advertising  and promotion  expense also increased
slightly over the same period.

Our  effective  tax rates for the nine months ended  September 30, 2001 and 2000
were 36.6% and 32.4%,  respectively.  The higher  effective tax rate is due to a
decrease in our tax-exempt investment securities in 2001 compared to 2000.

                                       16
<PAGE>



Liquidity and Capital Resources

The Company  does not  currently  have any  business  activities  other than the
operation of the Bank and does not have significant on-going funding commitments
other than the payment of dividends to  shareholders.  To date,  the Company has
used the proceeds from its initial  public  offering and dividends from the Bank
to  meet  its  liquidity  needs.  The  Bank is  subject  to  various  regulatory
limitations  on the payment of  dividends  to the  Company.  The Company  paid a
return of capital distribution with funds on hand and approximately $3.0 million
in borrowings  from a third party lender during the fourth  quarter of 1999. The
Bank received permission from the OTS to pay a dividend to the Company in excess
of  regulatory  safe  harbor  amounts in order to allow the Company to repay the
loan in the first quarter of 2000.

Our most liquid  assets are cash and amounts due from  depository  institutions,
which are short-term highly liquid investments with original  maturities of less
than three months that are readily  convertible  to known  amounts of cash.  The
levels of these assets are dependent on our  operating,  financing and investing
activities  during any given period.  Our primary sources of funds are deposits,
proceeds from principal and interest payments on loans and investment securities
and earnings.  While  scheduled  principal  repayments  on loans and  investment
securities are a relatively  predictable source of funds, deposit flows and loan
and investment securities prepayments are greatly influenced by general interest
rates,  economic  conditions,  competition and other factors.  We do not solicit
deposits  outside  of  our  market  area  through  brokers  or  other  financial
institutions.

We have also  designated all of our investment  securities as available for sale
in order to meet liquidity demands.  In addition to internal sources of funding,
as a  member  of the  Federal  Home  Loan  Bank  we have  substantial  borrowing
authority  with the Federal Home Loan Bank.  Our use of a  particular  source of
funds is based on need, comparative total costs and availability.

We have historically maintained substantial levels of capital. The assessment of
capital adequacy depends on several factors,  including asset quality,  earnings
trends,  liquidity and economic  conditions.  We seek to maintain high levels of
regulatory  capital to give us maximum  flexibility  in the changing  regulatory
environment and to respond to changes in market and economic  conditions.  These
levels of capital have been achieved through consistent earnings enhanced by low
levels of noninterest expense and have been maintained at those high levels as a
result of our policy of moderate growth  generally  confined to our market area.
At September 30, 2001 and December 31, 2000, we exceeded all current  regulatory
capital requirements and met the definition of a "well-capitalized" institution,
the highest regulatory capital category.

We are required to maintain  minimum  levels of liquid  assets as defined by OTS
regulations. This requirement,  which may be varied at the discretion of the OTS
depending  on  economic  conditions  and  deposit  outflows,  is  based  upon  a
percentage of deposits and, if any,  short-term  borrowings.  We exceeded all of
the liquidity requirements of the OTS as of both September 30, 2001 and December
31, 2000.










                                       17
<PAGE>



PART II.  OTHER INFORMATION
          -----------------

Item 1.  Legal Proceedings

         None.

Item 2.  Changes in Securities and Use of Proceeds

         None.

Item 3.  Defaults 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:

         The following exhibits are filed as a part of this report:

          3.1(1) Charter of United Tennessee Bankshares, Inc.

          3.2(1) Bylaws of United Tennessee Bankshares, Inc.

          4(1) Form of Stock Certificate of United Tennessee Bankshares, Inc.

          10.1(2) United Tennessee Bankshares, Inc. 1999 Stock Option Plan

          10.2(2) United Tennessee Bankshares, Inc. Management Recognition Plan

          10.3(a)(1) Employment  Agreements  between Newport Federal Savings and
               Loan  Association  and  Richard G.  Harwood,  Nancy L. Bryant and
               Peggy Holston

          10.3(b)(1) Forms of  Guarantee  Agreements  between  United  Tennessee
               Bankshares,  Inc.  and  Richard G.  Harwood,  Nancy L. Bryant and
               Peggy Holston

          10.4(1)  Newport  Federal  Savings  and  Loan  Association   Long-Term
               Incentive Plan

          10.5(1)  Newport  Federal  Savings  and  Loan   Association   Deferred
               Compensation Plan
---------------
(1)  Incorporated   by  reference  to  United   Tennessee   Bankshares,   Inc.'s
     Registration Statement on Form SB-2, File No. 333-36465.
(2)  Incorporated   by  reference  to  United   Tennessee   Bankshares,   Inc.'s
     Registration Statement on Form S-8, File No. 333-82803.

     (b) Reports on Form 8-K:

United  Tennessee  Bankshares,  Inc.  did not file a current  report on Form 8-K
during the quarter covered by this report.

                                       18
<PAGE>


                                   SIGNATURES


     In accordance  with the  requirements  of the Exchange Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                      UNITED TENNESSEE BANKSHARES, INC.
                                      Registrant



Date: November 13, 2001              /s/ Richard G. Harwood
                                     -------------------------------------------
                                     Richard G. Harwood
                                     President and Chief Executive Officer
                                     (Duly Authorized Representative and
                                     Principal Financial and Accounting Officer)