10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

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(X)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended December 31, 2008

OR

(  )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES                

EXCHANGE ACT OF 1934

For the transition period from __________to _________

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Commission File Number 2-27985

1^st FRANKLIN FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Georgia	58-0521233
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
135 East Tugalo Street
Post Office Box 880
Toccoa, Georgia	30577
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:  (706) 886-7571

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  __   No   X 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  __   No   X 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes   X    No  __

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(Cover page 1 of 2 pages)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    X 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company”” in Rule 12b-2 of the Exchange Act.  (Check one):  

Large Accelerated Filer __     Accelerated Filer __     Non Accelerated Filer  X  

Smaller Reporting Company  __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  __   No   X 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter:   Not Applicable.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
Class	Outstanding at February 28, 2009
Common Stock, $100 Par Value	1,700 Shares
Non-Voting Common Stock, No Par Value	168,300 Shares

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2008 are incorporated by reference into Parts I and II of this Form 10-K.

(Cover page 2 of 2 pages)

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PART I

Item 1.

BUSINESS:

The Company, Page 1 and Business, Pages 4-11, of the Company’s Annual Report to security holders for the fiscal year ended December 31, 2008 (the “Annual Report”) are incorporated herein by reference.

Item 1A.

RISK FACTORS:

The risk factors set out below describe the known material risks to a potential investment in 1^st Franklin.  A potential investor should carefully consider the risks described below, as well as the other risks and information disclosed from time to time by 1^st Franklin, before deciding whether to invest in the Company.  Additional risks and uncertainties not presently known to us or that we currently do not consider to be material could also adversely affect us. If any of the situations described in the following risk factors actually occur, our business, financial condition or results of operations could be materially adversely affected.  In any of these events, an investor may lose part or all of your investment.

Because we require a substantial amount of cash to service our debt, we may not be able to pay all of the obligations under our indebtedness.

To service our indebtedness, including interest on the sale of outstanding debt securities and amounts due under our credit agreement, we require a significant amount of cash.  Our ability to generate cash depends on many factors, including our successful financial and operating performance.  We cannot assure you that our business strategy will continue to succeed or that we will achieve our anticipated financial results.

If we do not achieve our anticipated results, we may not be able to generate sufficient cash flow from operations or to obtain sufficient funding to satisfy all of our obligations.  The failure to do this would result in a material adverse affect on our business.

Because we depend on liquidity to operate our business, a decrease in the sale of our debt securities, an increase in requests for their redemption or the unavailability of borrowings under a credit agreement may make it more difficult for us to pay our obligations in a timely manner.

Our liquidity depends on, and we fund our operations through, the sale of our debt securities, the collection of our receivables and the continued availability of borrowings under our credit agreement.  Numerous available investment alternatives have resulted in investors evaluating more critically their investment opportunities.  We cannot assure you that our debt securities will offer interest rates and redemption terms which will generate sufficient sales to meet our liquidity requirements.  In addition, our current credit agreement terminates in December 2009.  While we are in the process of negotiating a new credit agreement, no assurances can be provided that we will be able to do so on commercially reasonable terms, in a timely manner, or at all.

As described more fully elsewhere in this Annual Report, our senior demand notes can be redeemed at any time without penalty.  Our variable rate subordinated debentures are subject to redemption by investors at the end of any interest adjustment period prior to their maturity at the option of the debenture holder and may be requested to be redeemed during an interest adjustment period, although we are not obligated to accept requests for redemption of debentures during any interest adjustment period, and any of those requests are subject to one-half the interest earned since the most recent interest adjustment date, if applicable, or the purchase date.  It is possible that a significant number of redemption requests could adversely affect our liquidity.

Because most of our loans are made to salaried people and other wage earners who generally depend upon their earnings to meet their repayment obligations, continued high or increasing unemployment could adversely impact our liquidity, financial condition and results of operations.

Our business consists mainly of making loans to salaried people or other wage earners who depend on their earnings to meet their repayment obligations.  As a result, the loss of employment by such borrowers is likely to make it more difficult for them to timely repay their obligations to the Company.  Additionally, adverse general economic conditions, including high unemployment rates, often result in additional challenges for both the Company and potential customers, resulting in a rising number of bankruptcy filings and a lower number of qualified borrowers.  Upon the occurrence of either event, the Company’s liquidity, financial condition and results of operations could be adversely impacted.

In either event, any reduced liquidity due to any of the reasons above could negatively impact our ability to pay the principal and interest on any of our outstanding debt securities when due.

All of our offers and sales of securities must comply with applicable securities laws, or we could be liable for damages, which could impact our ability to make payments on our outstanding debt securities.

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Offers and sales of all of our securities must comply with all applicable federal and state securities laws, including Section 5 of the Securities Act of 1933.  If any of our offers, including those made pursuant to newspaper or radio advertisements, or sales are found not to be in compliance with any of these laws, we could be liable to certain purchasers of the security, could be required to repurchase the security, or could be liable for damages or other penalties.  If we are required to repurchase any of our securities other than in the ordinary course of our business as a result of any such violation, or otherwise are found to be liable for any damages or penalties as a result of any such violation, our financial condition could be materially adversely affected.  Any such adverse affect on our financia l condition could materially impair our ability to pay principal and interest on our outstanding debt securities.

Current economic conditions are negatively affecting our operations and profitability, and we cannot assure you that our operations and profitability will not continue to be negatively affected.

Rising unemployment and other factors typical of recessionary economic cycles are affecting our investors’, customers’, and potential investors’ and customers’ disposable income, confidence, and spending patterns and preferences, which in turn are negatively impacting our sales of investment securities and our customers’ ability to repay their obligations to us.  As a result, we have increased our provision for credit losses in order to set our allowance for credit losses at a level deemed appropriate by Management.  This increase in our provision for loan losses has had a negative impact on our operations and profitability.  Should the current economic conditions continue or worsen, our operations and profitability could continue to be materially and adversely affected.

An increase in the interest we pay on our debt and borrowings can materially and adversely affect our net interest margin.

Net interest margin represents the difference between the amount that we earn on loans and investments and the amount that we pay on debt securities and other borrowings.  The loans we make in the ordinary course of our business are subject to the interest rate and regulatory provisions of each applicable state's lending laws and are sometimes made at fixed rates which are not adjustable during the term of the loan. Since some loans are made at fixed interest rates and are made using the proceeds from the sale of our fixed and variable rate securities, we may experience a decrease in our net interest margin because increased interest costs cannot be passed on to all of our loan customers.  A reduction in our net interest margin could adversely affect our ability to make payments on our outstanding debt securitie s.

Neither the Company nor any of its debt securities are or will be rated by any nationally recognized statistical rating agency, and this may increase the risk of your investment.

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Neither 1^st Franklin nor any of its debt securities are, or are expected to be, rated by any nationally recognized statistical rating organization.  Typically, credit ratings assigned by such organizations are based upon an assessment of a company’s creditworthiness and are a measure used in establishing the interest rate that a company offers on debt securities it issues.  Without any such rating, it is possible that fluctuations in general economic, or industry specific, business conditions, changes in results of operations, or other factors that affect the creditworthiness of a debt issuer may not be fully reflected in the interest rate on any outstanding indebtedness of that issuer.  Investors in the Company’s securities must depend solely on the creditworthiness of 1^st F ranklin for the payment of principal and interest on those securities.  In the absence of any third party credit rating, it is possible that the interest rates offered by the Company on its debt securities may not represent the credit risk that an investor assumes in purchasing any of these securities.

Consumer finance companies such as the Company are subject to an increasing number of laws and government regulations, and if we fail to comply with these laws or regulations, our business may suffer and our ability to pay our obligations may be impaired.

Our operations are subject to increasing focus by federal, state and local government authorities and state attorneys general and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions on certain lending practices by companies in the consumer finance industry, sometimes referred to as "predatory lending" practices.  These requirements and restrictions, among other things:

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require that we obtain and maintain certain licenses and qualifications;

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limit the interest rates, fees and other charges that we are allowed to charge;

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require specified disclosures to borrowers;

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limit or prescribe other terms of our loans;

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govern the sale and terms of insurance products that we offer and the insurers for which we act as agent; and

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define our rights to repossess and sell collateral.

In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the loans we make.  Although we believe that we are in compliance in all material respects with applicable federal, state and local laws, rules and regulations, there can be no assurance that a change in any of those laws, or in their interpretation, will not make our compliance therewith more difficult or expensive, restrict our ability to originate loans, further limit or restrict the amount of interest and other charges we earn under such loans, or otherwise adversely affect our financial condition or business operations.  The burdens of complying with these laws and regulations, and the possible sanctions if we do not so comply, are significant, and may result in a downturn in our business or our inability to carry on our business in a manner similar to how we currently operate.

If we experience unfavorable litigation results, our ability to timely meet our obligations may be impaired.

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As a consumer finance company, in addition to being subject to the stringent regulatory requirements discussed above, we may become subject to various consumer claims and litigation seeking damages and statutory penalties.  The damages and penalties claimed by consumers and others can often be substantial.  The relief requested by the plaintiffs varies but generally includes requests for compensatory, statutory and punitive damages.  Unfavorable outcomes in any litigation or statutory proceedings could materially and adversely affect our results of operations, financial condition and cash flows and our ability to make payments on our outstanding obligations.

While we intend to vigorously defend ourselves against any of these proceedings, there is a chance that our results of operations, financial condition and cash flows could be materially and adversely affected by unfavorable outcomes which, in turn, could affect our ability to make payments on, or repay, our outstanding obligations.

We are continuing to devote resources to comply with various provisions of the Sarbanes-Oxley Act, and this may reduce the resources we have available to focus on our core business.

In order to ensure compliance with the various provisions of the Sarbanes-Oxley Act, we are required to, among other things, evaluate our internal controls to allow management to report on, and, with respect to future fiscal years, to allow our independent registered public accounting firm to attest to, our internal controls over financial reporting.  While we have completed this evaluation for 2008, we are continuing to evaluate our internal controls and business processes which are required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act in the future. During the course of our future testing, we may identify deficiencies which we may not be able to remediate in time to meet any future deadline for compliance with Section 404.  The proces ses involved in testing and maintaining internal controls also involve significant costs and can divert our management's attention from other matters that are important to our business.  Among other things, we may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404, and our independent auditors may not be able or willing to issue a favorable opinion on our internal controls.  Either of these, or any other failures to comply with the various requirements of the Sarbanes-Oxley Act, may require significant management time and expenses, and divert attention or resources away from our core business.

Item 1B.

UNRESOLVED STAFF COMMENTS:

Not Applicable.

Item 2.

PROPERTIES:

Paragraph 1 of The Company, Page 1; paragraph 1 (and the accompanying table) of Footnote 8 (Commitments and Contingencies) of the Notes to Consolidated Financial Statements, Page 35; and map of branch offices, page 44 of the Annual Report, are incorporated herein by reference.

Item 3.

LEGAL PROCEEDINGS:

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From time to time, the Company is involved in various claims and lawsuits incidental to its business.  In the opinion of Management based on currently available facts, the ultimate resolution of any such claims and lawsuits is not expected to have a material effect on the Company’s financial position, liquidity, or results of operations.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

No matters were submitted to a vote of security holders during the quarter ended December 31, 2008.

PART II

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES:

Sources of Funds, Page 11 of the Annual Report is incorporated herein by reference.

Item 6.

SELECTED FINANCIAL DATA:

Selected Consolidated Financial Information, Page 3 of the Annual Report is incorporated herein by reference.

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS:

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Pages 12-20 of the Annual Report is incorporated herein by reference.

Item 7A.

QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures About Market Risk sub-heading, Page 16 of the Annual Report is incorporated herein by reference.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

Report of Independent Registered Public Accounting Firm and the Company’s Consolidated Financial Statements and Notes thereto, Pages 21-41 of the Annual Report are incorporated herein by reference.

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Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE:

Not applicable.

Item 9A.

CONTROLS AND PROCEDURES:

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.    Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chairman and Chief Executive Officer (“CEO”) and Executive Vice President and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures under Rule 13a-14(c) and Rule 15d-14(c) of the Securities Exchange Act of 1934 were effective at December 31, 2008.

There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING:

The Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  An internal control system over financial reporting has been designed to provide reasonable assurance regarding the reliability and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Management recognizes that there are inherent limitations in the effectiveness of any internal control system.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.  Based on this evaluation, Management believes that internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), was effective as of December 31, 2008.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding the effectiveness of internal controls over financial reporting.  management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report on this Annual Report.

Item 9B.

OTHER INFORMATION:

None.

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Forward Looking Statements:

Certain statements contained or incorporated by reference herein under the captions “Risk Factors”,  “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and elsewhere in this Annual Report may constitute “forward-looking statements” within the meaning of the federal securities laws.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.  Such factors include, among other t hings, those set out under the caption “Risk Factors”, the ability to manage cash flow and working capital, the accuracy of Management’s estimates and judgments, adverse economic conditions including the interest rate environment, unfavorable outcomes of litigation, federal and state regulatory changes and other factors referenced elsewhere herein or incorporated herein by reference.

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PART III

Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS

			Position(s)
Name of Director	Age	Director Since	with Company
Ben F. Cheek, III  (3)(5)	72	1967	Chairman of Board / Chief Executive Officer
Ben F. Cheek, IV (3)(4)(5)	47	2001	Vice Chairman
A. Roger Guimond (3)(5)	54	2004	Executive Vice President / Chief Financial Officer
John G. Sample, Jr. (1)(2)(5)	52	2004	None
C. Dean Scarborough (1)(2)(5)	54	2004	None
Robert E. Thompson (1)(2)(5)	76	1970	None
Keith D. Watson (1)(2)(5)	51	2004	None

(1)	Member of Audit Committee.
(2)	Mr. Sample has been the Senior Vice President and Chief Financial Officer of Atlantic American Corporation, an insurance holding company, since 2002.  Prior thereto, he was a partner with Arthur Andersen LLP since 1990.   For more than five years prior to 2006, Mr. Scarborough was co-owner of Scarborough’s Men’s Store.  He sold his interest in this business in 2006 and now is involved in real estate sales.  Dr. Thompson is a retired physician.  Mr. Watson is Vice President and Corporate Secretary of Bowen & Watson, Inc., a general contracting company, Mr. Watson has been in his position of employment, and Dr. Thompson has been retired, for more than five years.
(3)	Reference is made to “Executive Officers” for a discussion of business experience.
(4)	Son of Ben F. Cheek, III.
(5)	The term of each director will expire when a successor to such director is elected and qualified.
There was no, nor is there presently any, arrangement or understanding between any director and any other person (except directors and officers of the registrant acting solely in their capacities as such) pursuant to which the director was selected.

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Notwithstanding the fact that the Company’s equity securities are not currently traded on any national securities exchange or with any national securities association, the Board of Directors has determined that Messrs. Sample, Scarborough, and Watson, and Dr. Thompson, are “independent” (as such term is defined in the rules of the Securities and Exchange Commission (the “SEC”) and the National Association of Securities Dealers, Inc. (“NASDAQ”) Marketplace Rules).  In making this determination, the Board concluded that none of such persons have a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.  

The Audit Committee is composed of Messrs. Sample, Scarborough, and Watson, and Dr. Thompson.  Notwithstanding the fact that the Company’s equity securities are not currently traded on any national securities exchange or with any national securities association, in accordance with the provisions of the charter of the Audit Committee, the Board of Directors has determined that the members thereof are “independent” and that Mr. Sample is an “audit committee financial expert” as defined by the SEC in Rule 407(d)(5) of Regulation S-K.  In making such determination, the Board of Directors took into consideration, among other things, the express provision in Item 407(d)(5) of Regulation S-K that the designation of a person as an audit committee financial expert shall not impose any greater responsibility or liability on that person than the responsibility and liability imposed on that person as a member of the Audit Committee , nor shall it affect the duties or obligations of other Audit Committee members of the Board of Directors.

The Company is a family owned business in which Ben F. Cheek, III is the majority shareholder.  Because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions) or a charter outlining the responsibilities thereof.  The Company’s Executive Management Team (the “EMT”) consisting of executive officers of the Company, establishes the bases for all executive compensation, which compensation is approved by Mr. Cheek, III.  The executive officers comprising the EMT are:  Messrs. Cheek, III, Cheek, IV, Guimond, Coffee, Haynie and Culpepper, and Ms. Herring and Ms. Lovern.   Additional information concerning the processes and procedures for the consideration and dete rmination of executive officer and director compensation is contained under the heading “Compensation Discussion and Analysis” below.

EXECUTIVE OFFICERS

Name, Age, Position(s)
and Family Relationship	Business Experience
Ben F. Cheek, III, 72 Chairman of Board and Chief Executive     Officer	Joined the Company in 1961 as attorney and became Vice President in 1962, President in 1972 and Chairman of Board in 1989.
Ben F. Cheek, IV,  47 Vice Chairman Son of Ben F. Cheek, III	Joined the Company in 1988 working in Statistics and Planning. Became Vice Chairman in 2001.
Virginia C. Herring, 45 President Daughter of Ben F. Cheek, III	Joined the Company on a full time basis in April 1988 as Developmental Officer.  Since then, she has worked throughout the Company in different departments on special assignments and consultant projects. Became President in 2001.
Name, Age, Position(s)
and Family Relationship	Business Experience
A. Roger Guimond, 54 Executive Vice President, Chief Financial Financial Officer and Director No Family Relationship	Joined the Company in 1976 as an accountant and became Chief Accounting Officer in 1978, Chief Financial Officer in 1991 and Vice President in 1992. Was appointed Secretary in 1990 and Treasurer in 1992.  Became Executive Vice President in 2001.  Elected a Director in 2004.
J. Michael Culpepper, 54 Executive Vice President, Chief Operating     Officer No Family Relationship	Joined the Company in 1979, became Supervisor in 1984, Area Vice President in 1996, Vice President in 2001 and Executive Vice President and Chief Operating Officer in 2006.

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C. Michael Haynie, 54 Executive Vice President -      Human Resources No Family Relationship	Joined the Company in 2005 as Vice President - Human Resources. Became Executive Vice President - Human Resources on January 1, 2006.
Karen S. Lovern, 50 Executive Vice President –      Strategic and Organization Development No Family Relationship	Joined the Company in 2000 as Director of Training and Development.  Became Executive Vice President – Strategic and Organization Development on January 1, 2006.
Charles E. Vercelli, Jr., 48 Executive Vice President –      General Counsel No Family Relationship	Joined the Company in 2008 as Executive Vice President – General Counsel.
Lynn E. Cox, 51 Vice President -  Secretary / Treasurer No Family Relationship	Joined the Company in 1983 and became Secretary in 1990. Appointed Treasurer in 2002. Became Area Vice President and Secretary in 2001.  Promoted to Vice President in 2005.

The term of office of each Executive Officer expires when a successor is elected and qualified.  There was no, nor is there presently any, arrangement or understanding between any officer and any other person (except directors or officers of the registrant acting solely in their capacities as such) pursuant to which the officer was selected.

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, or any persons performing similar functions, as well as to its Directors and other employees.  A copy of this code of ethics is publicly available on the Company’s website at:   http//www.1ffc.com.  If we make any amendment to this code of ethics, other than a technical, administrative, or non-substantive amendment, or we grant any waiver from a provision of the code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions, we will disclose the nature of the amendment or waiver on our website.  Also, we may elect to disclose the amen dments or waiver in a report on Form 8-K filed with the SEC.

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Item 11.  EXECUTIVE COMPENSATION:

Compensation Discussion and Analysis

Overall Philosophy:

The overall objective of the Company is to achieve specific annual and long-term strategic goals set by the Executive Management Team (the “EMT”) from time to time, while maintaining a healthy financial position.  It is the overall responsibility of our executive officers to successfully manage the Company to reach this objective. Our compensation philosophy revolves around the motivation to achieve, and achievement of, these goals and is designed to attract and retain top executives, and to incentivize and to reward the executive officers for their efforts and successes.

Role of Executive Officers in Compensation Decisions:

The Company is a family-owned business in which Ben F. Cheek, III, the Chairman and Chief Executive Officer, is the majority stockholder.  Because of the closely-held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions).  The Executive Management Team (the “EMT”), consisting of executive officers of the Company, establishes the bases for all executive officer compensation, which compensation is approved by Mr. Cheek, III.  The EMT consists of Messrs. Cheek, III, Cheek IV, Guimond, Haynie, Culpepper and Vercelli, and Ms. Herring and Ms. Lovern.

Components of Compensation:

The principal components of the Company’s executive compensation program include base salary, discretionary bonus awards and non-equity incentive plan compensation. The Company also expects that earnings on non-qualified deferred compensation amounts and other compensation, including certain perquisites as detailed below, will add to each executive officer’s overall total compensation each year.  Given the family-owned nature of the Company, the Company does not have available for grant, and does not deem it appropriate to pay, any equity based compensation.  The EMT considered this fact when determining other components and amounts of compensation.

Base Salary:

The Company provides executive officers, and other employees, with a base salary to compensate them for services rendered throughout the year.  Salaries for all executive officers are established annually by Messrs. Cheek III and Cheek, IV and Ms. Herring, based on the level of each executive officer’s responsibility, tenure with the Company and certain publicly available market data with respect to salaries paid for like positions in comparable companies.  In addition, base salary levels are set taking into account the fact that the Company does not provide equity-based compensation, as described elsewhere.  Each executive officer has goals set annually which are reviewed with the officer by the President, Vice Chairman and Chief Executive Officer throughout the year.  These goals typically very depending on the nature of the Executive’s responsibilities.  A formal individual performance and development review is also held each year with each executive officer and Ms. Herring and Mr. Cheek, III, in which the level of achievement with respect to such goals is discussed.  Merit based increases to salaries are based on the assessment of each executive’s performance review and overall Company performance.

Bonus Awards:

Bonus amounts paid to the executive officers include discretionary bonuses and may include certain cash bonuses from time to time for special recognition, each determined at the discretion of the EMT and approved by the Chief Executive Officer.  The EMT may consider, among other factors, the Company’s inability to grant equity-based award to its officers and employees, as described below, when determining whether and to what extent to make awards.  In November, 2008 and 2007, the executive officers were paid a holiday bonus of 4% of their respective base salaries.   In addition to the 4% bonus, Mr. Cheek, III  retains the discretion to award certain additional amounts.  In 2008, Mr. Guimond was awarded an additional discretionary bonus in recognition of his continued contributions and service to the Company and its subsidiaries (for which he received no separate compensation during such period).

Non-Equity Incentive Compensation:

The Company’s stock is not traded or quoted on any national securities exchange or association, but rather is closely held by the Mr. Cheek, III, and his family.  As a result, the Company does not grant stock or other equity based awards.  In consideration of this and other factors, and in order to provide certain known targets, the achievement of which would trigger the payment of additional compensation, the EMT has, historically, adopted annual incentive compensation plans.  For Example, in January 2008 the EMT approved the Company’s 2008 Bonus Plan (the “2008 Bonus Plan”).  

The 2008 Bonus Plan was a cash-based incentive plan designed to promote high performance and the achievement of various short-term corporate goals. Under the 2008 Bonus Plan, a minimum pre-tax income threshold of $12.0 million was established as a baseline goal to be achieved in order for any payouts to be made under such Plan.  The EMT determined that pre-tax income was an appropriate measure upon which to evaluate our annual performance due to the Company’s status as an S Corporation which generally does not pay corporate income taxes.  

If that threshold is met, payouts under the 2008 Bonus Plan were based on the number of other strategic goals met by the Company.  For 2008, the EMT identified five strategic goals in addition to the minimum pre-tax income threshold goal.  Each goal was chosen as a critical metric for the continued growth and financial soundness of the Company based on the impact the achievement of such goals has on the Company’s results of operations and financial condition.  The goals are:

(i)

Minimum 7.50% corporate net receivables growth;

(ii)

Delinquency control – Percent of accounts with balances 30 days or more

past due, not to exceed 11.50% of outstanding receivables;

(iii)     $18.0 million minimum pre-tax income goal (separate from minimum threshold goal);

(iii)     Maximum corporate expense / revenue ratio of 90.0% or less; and

(iv)     Minimum 4.00% return on assets.

Bonus payouts under the Plan depended on the number of goals met as follows:

No. of Strategic Goals Met

Bonus Payout (% of Salary)

1

5% - 25%

2

5% - 35%

3

5% - 45%

4

5% - 55%

5

5% - 65%

Amounts paid to each executive officer varied within each range depending on personal performance milestones, as determined by the EMT.  The actual amounts paid to each executive officer are set out in the Summary Compensation Table which follows, under the heading “Non-Equity Incentive Plan Compensation”.

Deferred Compensation:

The Company offers all eligible employees the opportunity to participate in a Company-sponsored deferred compensation plan in accordance with Section 401(k) of the Internal Revenue Code.  The Company “matches” employee contributions of up to 6% of their salary, using the following formula: 100% of first 1% and 70% of next 5% deferred.

As a result of certain federal limitations on the ability of management or highly compensated employees (within the respective meanings of Section 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee Retirement Income Security Act of 1974) to participate in such plans, Management determined to establish the Company’s Executive Nonqualified Deferred Compensation Plan) (the “Deferred Compensation Plan”).  Pursuant to the plan, the Company annually credits the account of each participant who received more than the Section 401(a)(17) salary limit (as described in the Internal Revenue Code of 1986) with a discretionary amount that is usually, but not always, equal to the amount the participant would have received as a 401(k) Company matching contribution on the amount of their salary above the 401(a)(17) limit had they been allowed to defer 6% of that amount into the qualified plan.  Management determined that it was appropriat e to offer the Deferred Compensation Plan, and the matching contribution consistent with the level provided by employees generally, to such persons as if they were eligible to participate in Company sponsored plans open to other employees.

Perquisites and Other Compensation:

The Company believes that providing its executive officers with certain reasonable perquisites and other compensation is consistent with the Company’s overall compensation philosophy designed to attract and retain top executives.  The EMT periodically reviews the types and amounts of perquisites and other compensation provided to the Company’s executive officers.  In conducting this review, the EMT considers, among other things, the types and ranges of compensation provided at various similar sized or situated\ companies.

The Company’s executive officers are provided the use of Company-owned automobiles and granted a travel allowance to cover certain costs of business-related travel when an overnight stay is not required and the Company’s travel expense policy is not otherwise involved.  These amounts are included in the taxable income of the executive officers.  In addition, the Company generally provides certain insurance benefits to its employees and executive officers.  This includes long-term disability and travel accident insurance (which pays a benefit upon the occurrence of certain specific events), as well as basic life and accidental death insurance coverage, which coverage is provided on a graduated scale based on seniority.  In addition, in recognition of those individuals with twenty or more years of experience with the Company, the Company provides them certain excess medical benefits not covered by the Company’s traditiona l medical plans.  In 2008 Messrs. Cheek, III, Cheek, IV, Guimond and Culpepper received this benefit.  In addition, during 2008, Messrs. Cheek, III and Cheek, IV, and Ms. Herring, based on positions as shareholders and executive officers, were determined eligible to participate in the Company’s medical expenses reimbursement program (“MERP”), which provides reimbursement for amounts not otherwise covered under policies for which these officers are eligible to participate in.

These amounts are reflected in the Summary Compensation Table and related notes below.

Employment Agreements and Change in Control Arrangements:

The Company does not enter in to employment agreements with its executive officers.  Given the nature and location of its business, and the fact that the Company is a family owned business with closely held ownership, the Company has not had significant turnover among its senior management, and has determined that it is not necessary to enter into such agreements with its executives.

For similar reasons, due to the nature of compensation and the fact that a change in control of the Company is unlikely without significant input and approval from the EMT and the Company’s closely held ownership, the EMT has determined that it is not necessary to condition any payments upon, or make any amounts contractually payable upon, any change in control of the Company.

Compensation Committee Report:

In the absence of a standing compensation committee, the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with Management and, based on such review and discussions, determined that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

The Board of Directors:

Ben F. Cheek, III

C. Dean Scarborough

Ben F. Cheek, IV

Robert E. Thompson

A. Roger Guimond

Keith D. Watson

John G. Sample, Jr.

Summary Compensation Table
Name and Principal Position	Year	Salary	Bonus (1)	Non-Equity Incentive Plan Compensation (2)	Change in Pension Value And Non-Qualified Deferred Compensation Earnings	All Other Compensation (3)	Total
Ben F. Cheek, III   Chairman and   CEO	2008 2007 2006	$ 240,000 $ 240,000 $ 240,000	$ 9,600 $ 9,600 $ 9,600	$ - $ - $ -	$ - $ - $ -	$ 121,749 $ 117,393 $ 119,731	$ 371,349 $ 366,993 $ 369,331
Ben F. Cheek, IV   Vice Chairman	2008 2007 2006	$ 197,917 $ 173,424 $ 154,000	$ 7,917 $ 6,937 $ 6,160	$ 39,583 $ 104,054 $ 84,700	$ - $ - $ -	$ 45,687 $ 37,817 $ 34,970	$ 291,104 $ 322,232 $ 279,830
Virginia C. Herring   President	2008 2007 2006	$ 197,917 $ 173,424 $ 154,000	$ 7,917 $ 6,937 $ 6,160	$ 39,583 $ 104,054 $ 84,700	$ $ - $ -	$ 35,948 $ 32,349 $ 22,561	$ 281,365 $ 316,764 $ 267,421
A. Roger Guimond   Executive Vice President   And Chief Financial   Officer	2008 2007 2006	$ 289,230 $ 277,800 $ 263,550	$ 23,751 $ 25,469 $ 49,254	$ 101,231 $ 180,570 $ 171,308	$ $ - $ -	$ 52,532 $ 35,358 $ 27,352	$ 466,744 $ 519,197 $ 511,464
J. Michael Culpepper   Executive Vice President   And Chief Operating   Officer	2008 2007 2006	$ 217,860 $ 203,000 $ 179,650	$ 8,714 $ 8,120 $ 7,186	$ 76,251 $ 131,950 $ 116,773	$ $ - $ -	$ 15,425 $ 7,972 $ 35,619	$ 318,250 $ 351,042 $ 339,228
(1) Consists of a bonus paid at the discretion of the EMT and approved by the Chief Executive Officer.  The bonus was equal to 4% of salary.  Mr. Guimond was also paid an additional discretionary bonus each year.
(2) Consists of payouts under the Company’s 2008, 2007 and 2006 Bonus Plans.  Amounts under the 2008 Bonus Plan were paid in 2009 but deemed earned in 2008 based on the Company’s 2008 performance.   Amounts under the 2007 Bonus Plan were paid in 2008 but deemed earned in 2007 based on the Company’s 2006 performance.  Amounts under the 2006 Bonus Plan were paid in 2007 but deemed earned in 2006 based on the Company’s 2006 performance.
(3) All other compensation for executive officers is detailed as follows:

- -#- -

Name	Year	Personal Use of Company Auto	Travel Allowance	Insurance Premiums	Director Fees (1)	Relocation Reimburse- ment  (2)	Company Contribution To Deferred Comp Plan	Other (3)	Total
Ben F. Cheek, III	2008 2007 2006	$ 7,346 $ 8,825 $ 11,105	$ 2,400 $ 2,400 $ 2,400	$ 7,720 $ 3,415 $ 3,518	$ - $ - $ -	$ - $ - $ -	$ 3,461 $ 1,931 $ 1,886	$ 100,822 $ 100,822 $ 100,822	$ 121,749 $ 117,393 $ 119,731
Ben F. Cheek, IV	2008 2007 2006	$ 385 $ 389 $ 204	$ 2,400 $ 2,400 $ 2,400	$ 4,094 $ 1,618 $ 1,956	$ 15,000 $ 15,000 $ 12,000	$ - $ - $ -	$ 5,398 $ - $ -	$ 18,410 $ 18,410 $ 18,410	$ 45,687 $ 37,817 $ 34,970
Virginia C. Herring	2008 2007 2006	$ 5,750 $ 8,955 $ 553	$ 2,400 $ 2,400 $ 2,400	$ 3,990 $ 2,584 $ 1,198	$ - $ - $ -	$ - $ - $ -	$ 5,398 $ - $ -	$ 18,410 $ 18,410 $ 18,410	$ 35,948 $ 32,349 $ 22,561
A. Roger Guimond	2008 2007 2006	$ - $ - $ -	$ 2,400 $ 2,400 $ 2,400	$ 2,287 $ 2,077 $ 2,036	$ 15.000 $ 15,000 $ 12,000	$ - $ - $ -	$ 32,845 $ 15,881 $ 10,916	$ - $ - $ -	$ 52,532 $ 35,358 $ 27,352
J. Michael Culpepper	2008 2007 2006	$ 617 $ 589 $ 324	$ 2,400 $ 2,400 $ 2,400	$ 1,994 $ 1,770 $ 1,649	$ - $ - $ -	$ - $ - $ 30,744	$ 10,414 $ 3,213 $ 502	$ $ - $ -	$ 15,425 $ 7,972 $ 35,619

(1)

Messrs. Cheek IV and Guimond, both Directors of the Company elected to receive their 2008 director fees as deferred compensation.  See “Executive Non Qualified Deferred Compensation Plan” and “Director Fees” below.

(2)

Mr. Culpepper was promoted to Executive Vice President and Chief Operating Officer in 2006.  In connection with the relocation of his primary residence at the Company’s request, he was provided with a relocation stipend.

(2)

The Company leases its home office building and print shop for a total of $12,600 per month from Franklin Enterprises, Inc. under leases which expire December 31, 2010.  Shareholders of Franklin Enterprises, Inc. are also shareholders of the Company.  Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own 66.67% and 11.11% of the shares of Franklin Enterprises, respectively. Ms. Herring, an Executive Officer, owns 11.11% of Franklin Enterprises, Inc.  The amounts included in “Other” compensation are the pro rata amounts, based on such ownership, paid by the Company to Franklin Enterprises, Inc.  

The Company leases its Clarkesville, Georgia branch office for a total of $400 per month from Cheek Investments, Inc. under a lease which expires on June 30, 2010.  Shareholders of Cheek Investments, Inc. are also shareholders of the Company.  Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own .50% and 33.17% of the shares in Cheek Investments, respectively. Ms. Herring, an Executive Officer, owns 33.17% Cheek Investments, Inc.  The amounts included in “Other” compensation of each such person include the pro rata amounts, based on such ownership, paid by the Company to Cheek Investments, Inc.

Compensation Committee Interlocks and Insider Participation

The Company is a family owned business in which Ben F. Cheek, III is the majority shareholder.  Because of the closely held nature of ownership, the Company does not have an official compensation committee (or other official committee of the Board of Directors performing equivalent functions) or a charter outlining there responsibilities thereof.  The EMT establishes the bases for all executive compensation, which compensation is approved by Mr. Cheek, III.

During 2008, none of the Company’s executive officers served as a member of the board of directors or compensation committee of any entity for which a member of our Board served as an executive officer.

Executive Nonqualified Deferred Compensation Plan

Any management or highly compensated employee who has been designated by the Administrative Committee for the Company’s Deferred Compensation Plan as an eligible employee may participate in the Company’s Executive Nonqualified Deferred Compensation Plan (the “Plan”).   Outside directors are also eligible to defer their respective director fees into the Deferred Compensation Plan.

The Plan does not require any contribution to be made by a participant therein.

Interest is credited on the participant’s account on the last day of each quarter at an interest rate equal to the average of the interest rate during such quarter paid on the Company’s Variable Rate Subordinated Debentures with a one-year interest adjustment period.

Nonqualified Deferred Compensation Table
Name	Executive Contributions In Last Fiscal Year (1)	Registrant Contributions In Last Fiscal Year (2)	Aggregate Earnings In Last Fiscal Year	Aggregate Withdrawals / Distributions	Aggregate Balance At Last Fiscal Year End
Ben F. Cheek, III	$ -	$ 3,461	$ 33,851	$ -	$ 651,476
Ben F. Cheek, IV	$ 15,000	$ 5,398	$ 136	$ -	$ 20,534
Virginia C. Herring	$ -	$ 5,398	$ 100	$ -	$ 5,498
A. Roger Guimond	$ 15,000	$ 32,845	$ 7,721	$ -	$ 179,500
J. Michael Culpepper	$ -	$ 10,414	$ 493	$ -	$ 15,231
(1) Consists of compensation for service as a member of the Company’s Board of Directors voluntarily deferred by such person.  See “Directors Compensation Table” below. (2) Company contributions are included in the “All Other Compensation” portion of the Summary Compensation Table above.

Director Compensation
Name	Fees Earned Or Paid In Cash	All Other Compensation	Total
Ben F. Cheek, III	$       --	$       --	$       --
Ben F. Cheek, IV	$15,000	$       --	$15,000
A. Roger Guimond	$15,000	$       --	$15,000
John G. Sample, Jr.	$15,000	$   750	$15,750
C. Dean Scarborough	$15,000	$       --	$15,000
Jack D. Stovall (1)	$15,000	$       --	$15,000
Robert E. Thompson	$15,000	$       --	$15,000
Keith D. Watson	$15,000	$       --	$15,000

The Board of Directors has determined that the members thereof, whether or not such members are executive officers of the Company, are entitled to receive $15,000 per year for service as a member of the Board of Directors, including service on any committee thereof.  In addition, Mr. Sample also received $750 in travel-related expenses to attend meetings.  Messrs. Cheek IV, Guimond, Sample and Watson elected to receive their 2008 director fees as deferred compensation.  Mr. Cheek, III elected to waive any fees otherwise due to him for his service as a director in 2008.

Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS:
(a) Security Ownership of Certain Beneficial Owners:
Information listed below represents ownership in the Company with respect to any person (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who is known to the Company to be the beneficial owner of more than five percent of any class of the Company’s voting securities as of December 31, 2008.  Each such person has sole “beneficial” ownership of such shares (as described in applicable SEC rules relating to share ownership).

Name and Address of		Amount and Nature of	Percent of
Beneficial Owner	Title of Class	Beneficial Ownership	Class
Ben F. Cheek, III	Voting Common Stock	1,160 Shares - Direct	68.24%
1855 Orchard Drive
Clarkesville, Georgia  30523
Ben F. Cheek, IV	Voting Common Stock	180 Shares - Direct	10.59%
837 Beaver Dam Rd.
Toccoa, Georgia  30577
Virginia C. Herring	Voting Common Stock	180 Shares - Direct	10.59%
1135 Summit Ridge Dr.
Toccoa, Georgia  30577
David W. Cheek	Voting Common Stock	180 Shares - Direct	10.59%
4500 Barony Dr.
Suwanee, Georgia  30024

(b)

Security Ownership of Management:

Ownership listed below represents ownership in each class of equity securities of the Company as of December 31, 2008, by (i) Directors and Executive Officers of the Company named in the summary compensation table and (ii) all Directors and Executive Officers of the Company as a group.  Except as described below, each person has sole voting and dispositive power over such shares.

		Amount and Nature of	Percent of
Name	Title of Class	Beneficial Ownership	Class
Ben F. Cheek, III	Voting Common Stock	1,160 Shares - Direct	68.24%
	Non-Voting Common Stock	574 Shares – Direct	.34%
Ben F. Cheek, IV	Voting Common Stock	180 Shares - Direct	10.59%
	Non-Voting Common Stock	18,011 Shares - Direct	10.70%
	Non-Voting Common Stock	75,794 Shares – Indirect (1)	45.04%
Virginia C. Herring	Voting Common Stock	180 Shares - Direct	10.59%
	Non-Voting Common Stock	18,012 Shares - Direct	10.70%
	Non-Voting Common Stock	75,794 Shares – Indirect (1)	45.04%
A. Roger Guimond	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None
J. Michael Culpepper	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None
John G. Sample, Jr.	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None
C. Dean Scarborough	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None
Robert E. Thompson	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None
Keith D. Watson	Voting Common Stock	None	None
	Non-Voting Common Stock	None	None
All Directors and
Executive Officers	Voting Common Stock	1,520 Shares - Direct	89.41%
as a Group	Non-Voting Common Stock	574 Shares - Direct	.34%
(12 persons)	Non-Voting Common Stock	151,589 - Indirect (1)	90.07%

	(1)	Ben F. Cheek, III and Elizabeth Cheek were the grantors of six irrevocable trusts.  Two trusts were established for the benefit of each of Ben F. Cheek, IV, Virginia C. Herring and David W. Cheek.  The trustees of each of the trusts, who by virtue of dispositive power over the assets thereof, are deemed to be the beneficial owners of shares of the Company’s non-voting common stock contained therein, are the two persons named above who are not the named beneficiaries of each of the respective trusts.
(c)	The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company.

- -#- -

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE:

In accordance with the provisions of the written charter of the Audit Committee of the Board of Directors, the Audit Committee is to approve all related party transactions that are required to be disclosed pursuant to the rules and regulations of the SEC.

The Company leases its home office building and print shop for a total of $12,600 per month from Franklin Enterprises, Inc. under leases which expire December 31, 2010.  Shareholders of Franklin Enterprises, Inc. are also shareholders of the Company.  Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own 66.67% and 11.11% of the shares of Franklin Enterprises, Inc., respectively. Ms. Herring, an Executive Officer, owns 11.11% of Franklin Enterprises, Inc.  In Management's opinion, these leases are at rates and on terms which approximate those obtainable from independent third parties.

The Company leases its Clarkesville, Georgia branch office for a total of $400 per month from Cheek Investments, Inc. under a lease which expires June 30, 2010. Shareholders of Cheek Investments, Inc. are also shareholders of the Company.  Messrs. Cheek, III and Cheek, IV, both Directors and Executive Officers of the Company, own .50%% and 33.17% of the shares of Cheek Investments, Inc., respectively. Ms. Herring, an Executive Officer, owns 33.17% of Cheek Investments, Inc..  In Management’s opinion, the lease is at a rate and on terms which approximate those obtainable from independent third parties.

During 1999, a loan was extended to a real estate development partnership of which one of the Company’s beneficial owners (David W. Cheek) is a partner.  David Cheek (the adult son of Ben F. Cheek, III) owns 10.59% of the Company’s voting stock.  The loan was renewed on January 14, 2008.  The balance on this commercial loan (including principal and accrued interest) was $932,385 at December 31, 2008.  The maximum amount outstanding during the year was $1,677,762.  A total of $861,133 in principal and interest payments were applied against this loan during 2008.  The loan is a variable-rate loan with the interest based on the prime rate plus 1%. Interest is currently computed at an annual rate of 4.25%.  The interest rate adjusts whenever the prime rate changes.

Effective September 23, 1995, the Company and Deborah A. Guimond, Trustee of the Guimond Trust (an irrevocable life insurance trust, the “Trust”) entered into a Split-Dollar Life Insurance Agreement.  The life insurance policy insures A. Roger Guimond, Executive Vice President and Chief Financial Officer of the Company.  As a result of certain changes in tax regulations relating to split-dollar life insurance policies, the agreement was amended effectively making the premium payments a loan to the Trust.  The interest on the loan is a variable rate adjusting monthly based on the federal mid-term Applicable Federal Rate.  A payment of $6,888 for interest accrued during 2008 was applied to the loan on December 23, 2008.   No principal payments on this loan were made in 2008.  The balance on this loan at December 31, 2008 was $231,318.  This was the maximum loan amount outstanding during the year.

Notwithstanding the fact that the Company’s equity securities are not currently traded on any national securities exchange or with any national securities association, the Board of Directors has determined that Messrs. Sample, Scarborough and Watson, and Dr. Thompson, are “independent” (as such term is defined in the rules of the SEC and the NASDAQ Marketplace Rules).  In making this determination, the Board concluded that none of such persons have a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

- -#- -

Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES:

The Company was billed for professional services provided during fiscal years 2008 and 2007 by Deloitte & Touche LLP in the amounts set out in the following table, all of which were pre-approved by the Audit Committee.  Other than as set out below, the Company was not billed for any services provided by Deloitte & Touche LLP.

The Audit Committee of the Board of Directors has considered the services rendered by Deloitte & Touche LLP for services other than the audit of the Company’s financial statements and has determined that the provision of these services is compatible with maintaining the independence of Deloitte & Touche LLP.

		Fee	Fee
		Amount	Amount
		2008	2007
Services Provided:
Audit Fees (1)		$ 277,700	$ 254,600
Tax Fees (2)		63,710	79,545
Total		$ 341,410	$ 334,145
(1)	Fees in connection with the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2008 and December 31, 2007, and reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q during the 2008 and 2007 fiscal years.  Included in these amounts are fees of $10,500 and $4,000 for 2008 and 2007, respectively, related to review of registration statements.
(2)	Fees billed by Deloitte & Touche LLP for professional services rendered for tax compliance, tax advice and tax planning.  The services included the preparation of the Company’s and its subsidiaries’ tax returns.

All audit and non-audit services to be performed by the Company’s independent registered public accounting firm must be approved in advance by the Audit Committee. Pursuant to the Audit Committee Pre-Approval Policy (the “Policy”), and as permitted by Securities and Exchange Commission rules, the Audit Committee may delegate pre-approval authority to any of its members, provided that any service approved in this manner is reported to the full Audit Committee at its next meeting.  The Policy provides for a general pre-approval of certain specifically enumerated services that are to be provided within specified fee levels.  With respect to requests to provide services not specifically pre-approved pursuant to the general grant, such requests must be submit ted to the Audit Committee by the Company’s independent registered public accounting firm and its Chief Financial Officer and must include a joint statement as to whether, in their view, the request is consistent with Securities and Exchange Commission rules on auditor independence.

- -#- -

PART IV
Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
(a) (1) Financial Statements:
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Financial Position at December 31, 2008 and 2008.
Consolidated Statements of Income for the three years ended December 31, 2008.
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2008.
Consolidated Statements of Cash Flows for the three years ended December 31, 2008.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm.
Condensed Statements of Financial Position at December 31, 2008 and 2007.
Condensed Statements of Income for the three years ended December 31, 2008.
Condensed Statements of Cash Flows for the three years ended December 31, 2008.
(3) Exhibits:
	3.	(a)	Restated Articles of Incorporation as amended January 26, 1996 (incorporated herein by reference to Exhibit 3(a) to Form 10-K for the fiscal year ended December 31, 1995).
		(b)	Bylaws (incorporated herein by reference to Exhibit 3(b) to Form 10-K for the fiscal year ended December 31, 1995).
	4.	(a)	Indenture dated October 31, 1984, between the Company and The First National Bank of Gainesville, Trustee (incorporated by reference to Exhibit 4(a) to the Company’s Amendment No. 1 dated April 24, 1998 to the Registration Statement on Form S-2, File No. 333-47515).
		(b)	Form of Series 1 Variable Rate Subordinated Debenture (incorporated by reference to Exhibit 4(b) to Amendment No. 3 to the Registration Statement on Form S-2 dated November 14, 2005, File No. 333-126589).
		(c)	Agreement of Resignation, Appointment and Acceptance dated as of May 28, 1993 between the Company, The First National Bank of Gainesville, and Columbus Bank and Trust Company (incorporated by reference to Exhibit 4(c) to the Company’s Post-Effective Amendment No. 1 dated June 8, 1993 to the Registration Statement on Form S-2, File No. 33-49151).
		(d)	Modification of Indenture, dated March 30, 1995, by and among Columbus Bank and Trust Company, Synovus Trust Company and the Company (incorporated by reference to Exhibit 4(b) to the Company’s Form 10-K for the year ended December 31, 1994).
		(e)	Second Modification of Indenture dated December 2, 2004 by and among Synovus Trust Company and the Company (incorporated by reference to Exhibit 4(e) to the Registration Statement on Form S-2 dated July 14, 2005, File No. 333-126589).
		(f)	Form of Indenture by and between the Company and U.S. Bank National Association (incorporated by reference to Exhibit 4(a) to the Company’s Registration Statement on Form S-1, File No. 333-148331).
		(g)	Form of Senior Demand Note (incorporated by reference to Exhibit 4(b) to the Company’s Registration Statement on Form S-1, File No. 333-148331).
	9.	Not applicable
	10.	(a)	Credit Agreement, dated as of December 15, 2006, by and among the Company, Wachovia Bank, National Association, as administrative agent and as a lender, and BMO Capital Markets Financing, Inc., as lender (incorporated herein by reference to Exhibit 10.1 to Form 8-K dated December 21, 2006).
		(b)	Form of the Company’s 2008 Executive Bonus Plan (incorporated by reference to Exhibit 10.1 to Form 8-K dated January 30, 2008).
		(c)	Director Compensation Summary Term Sheet (incorporated by reference to Exhibit 10(c) to Form 10-K dated March 20, 2008).
		(d)	Form of the Company’s 2009 Executive Bonus Plan. *
	11.	Computation of Earnings per Share is self-evident from the Consolidated Statement of Income and Retained Earnings in the Annual Report, incorporated by reference herein.
	12.	Ratio of Earnings to Fixed Charges.
	13.	Annual Report.
	15.	Financial Statement Schedules.
	18.	Not applicable.
	19	Not applicable.
	21.	Subsidiaries of the Company.
	22.	Not applicable.
	23.	Consent of Independent Registered Public Accounting Firm.
	24.	Not applicable.
	27.	Not applicable.
	28.	Not applicable.
	31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
	31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
	32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*	Management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K.
(b)	See “Index to Exhibits”.
(c)	Not applicable.

- -#- -

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:

	1st FRANKLIN FINANCIAL CORPORATION
March   27,  2009	By:           /s/ Ben F. Cheek, III
Date	Ben F. Cheek, III
	Chairman of Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signatures	Title	Date
/s/ Ben F. Cheek, III		March 27, 2009
(Ben F. Cheek, III)	Chairman of Board;
	Chief Executive Officer
/s/ Ben F. Cheek, IV
(Ben F. Cheek, IV)	Vice Chairman	March 27, 2009
/s/ Virginia C. Herring
(Virginia C. Herring)	President	March 27, 2009
/s/ A. Roger Guimond
(A. Roger Guimond)	Executive Vice President;	March 27, 2009
	Principal Financial Officer
	Principal Accounting Officer; Director
/s/ John G. Sample, Jr.
(John G. Sample, Jr.)	Director	March 27, 2009
/s/ C. Dean Scarborough
(C. Dean Scarborough)	Director	March 27, 2009
/s/ Robert E. Thompson
(Robert E. Thompson)	Director	March 27, 2009
/S/ Keith D. Watson
(Keith D. Watson)	Director	March 27, 2009

- -#- -

Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
(a)	Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Form by reference (in which case see Rule 12b-23(b), every registrant which files an annual report on this Form pursuant to Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this Form, four copies of the following:
	(1)	Any annual report to security holders covering the registrant's last fiscal year; and
	(2)	Every proxy statement, form of proxy or other proxy soliciting material sent to more than ten of the registrant's security holders with respect to any annual or other meeting of security holders.
(b)	The foregoing material shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Act, except to the extent that the registrant specifically incorporates it in its annual report on this Form by reference.
(c)	This Annual Report on Form 10-K incorporates by reference portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 2008, which is filed as Exhibit 13 hereto.  Registrant is a privately held corporation and therefore does not distribute proxy statements or information statements.

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1st FRANKLIN FINANCIAL CORPORATION INDEX TO EXHIBITS
Exhibit No.	Description	Page No.
10(d)	Form of the Company’s 2009 Executive Bonus Plan	27
12	Ratio of Earnings to Fixed Charges	30
13	Annual Report	31
15	Financial Statement Schedule	78
21	Subsidiaries of Registrant	83
23	Consent of Independent Registered Public Accounting Firm	84
31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934	85
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934	86
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	87
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	88

- -#- -

EX-10

Exhibit 10 (d)

1^st Franklin Financial Corporation

Executive Bonus Plan:  2009

Plan Overview:

As we analyze the results from 2008, and review the budget set for 2009 and weigh in the economic forecast for the year, we recognize the need today, more than ever, to balance short-term results – growth and profit, with long-term positioning – new product development and improved systems.  This balance is expected to provide the foundation that remains critical for the future success of the Company.

Our long-range strategic plan, scheduled to take us into 2011 with rotating progress charted annually, will serve as a directional guide that we, as a Company, will use to obtain our Corporate Goals, our Mission Statement and our sustaining Core Values.   The short term bonus goals that are set for the Company each year, which are reflected in this Executive Bonus Plan, are the milestones which will drive the overall performance to achieve the long range goals and plans.

The Executive Bonus Plan for 2009 will focus first on meeting a minimum income requirement threshold, and thereafter meeting five strategic goals.  The combination of these goals is expected to provide a balanced measurement of 1^st Franklin’s performance and will also support the achievement of our long term goals.

Right to Alter Program

The Company reserves the right, at any time, or from time to time during the year, with or without notice, to continue or discontinue this program, or to alter it as necessary in the best interest of the Company.

The goals that are set were identified and agreed upon by the Executive Management Team.  Below are the five strategic goals, as well as the minimum income requirement for the 2009 bonus to be paid.

THRESHOLD:  

The Company must achieve minimum pre-tax

    income of $12 million for 2009.  If this threshold           is not met, the incentive bonus plan will not be paid.  

STRATEGIC GOALS:
	1.	Corporate Net Receivables Growth – a target of 4.0% annual growth;
	2.	Corporate Delinquency Control – 30 days or more delinquency (including bankrupt accounts) not to exceed 11.5% of receivables;
	3.	Corporate Expenses to Revenue – less than or equal to 92.0%;
	4.	Corporate Return on Assets (ROA) – greater than or equal to 3.25%;
	5.	Corporate Pre-tax Income (separate from the threshold goal) - $15.0 million.

PROGRAM ELIGIBILITY:

Company:  The threshold of $12 million in pre-tax income must be achieved for the Executive Bonus Plan to be activated.  After this requirement is achieved, the bonus will be paid based on the achievement of the strategic goals, and will be paid according to the following scale on an individual basis as a percentage of the participant’s annual salary.

No. of Strategic Goals Met	% Bonus Paid Based on Annual Salary
	(in increments of 5 percentage points)
1	Up to 25% (0% - 25%)
2	Up to 35% (0% - 35%)
3	Up to 45% (0% - 45%)
4	Up to 55% (0% - 55%)
5	Up to 65% (0% - 65%)

The percentage range is based on many factors, including but not limited to: achieving budget projections, achieving monthly / quarterly objectives, training (both individually and for the respective participant’s employees), PMR ratings and achievement of PMR goals, employee retention, managing human resource issues, audit and compliance guidelines, etc.

Example:  if the Company achieves the threshold, which will then activate the bonus plan, and any two strategic goals, the range of bonus paid will be from 0% to 35% of their annual salary depending on their performance.

INDIVIDUAL EXCEPTIONS:

If 1^st Franklin fails to achieve the minimum requirement of pre-tax profit – the Executive Bonus Plan, which is an incentive bonus plan based on performance, will not be paid.  However, the Executive Compensation Committee, which consists of;  Ben Cheek, Chairman; Buddy Cheek, Vice-Chairman; Ginger Herring, President; Roger Guimond, EVP/Chief Financial Officer; Mike Culpepper, EVP/Chief Operating Officer; Kay Lovern, EVP/Strategic and Organizational Development, and Mike Haynie, EVP/Human Resources, may chose to award individual bonuses to a select number of executives.  These exceptions will only be made if those said individuals have achieved an outstanding year by ALL standards.  In such a case, a bonus may be awarded but may be based on a lower scale than the above plan.

Executive Compensation Committee Review

The Executive Compensation Committee will review all executive, performance ratings and bonus recommendations and determine the final bonus awarded.  This includes all members of the Strategic Management Team:

AREA	RECOMMENDATION	COMMITTEE MEMBERS
Regional Operations Directors	Direct Report Vice President	Mike Culpepper, Ginger Herring, Buddy Cheek
Field Vice Presidents	Mike Culpepper	Mike Culpepper, Ginger Herring, Buddy Cheek
Home Office Supervisors, Area Vice Presidents, Vice Presidents	Direct Report	Ginger Herring, Buddy Cheek, Roger Guimond, Mike Haynie, Kay Lovern
Executive Vice Presidents, General Counsel	Ginger Herring	Ginger Herring, Buddy Cheek, Ben Cheek

Communication of Measurement

How well the Company is doing in achieving its goals will be communicated to all employees on a periodic basis (monthly) through e-mail and a “dashboard” analysis sent out with month-end statistics.  It can be located through our internal website:  Accounting / Month-end STATS button / 2009 folder / Corporate Financials and Goals for each month.  This file is usually available by the 20^th of the following month.  This progress will then need to be communicated to the branch employees as well, through the Regional Directors.

EX-12

Exhibit 12

RATIO OF EARNINGS TO FIXED CHARGES

	2008	2007	2006	2005	2004
	(In thousands, except ratio data)
Income before income taxes	$ 13,891	$ 15,754	$ 11,023	$ 7,621	$ 7,527
Interest on indebtedness	14,728	15,746	11,994	8,016	7,137
Portion of rents representative
of the interest factor	1,498	1,396	1,249	1,161	1,106
Earnings as adjusted	$ 30,117	$ 32,896	$ 24,266	$ 16,798	$ 15,770
Fixed charges:
Interest on indebtedness	$ 14,728	$ 15,746	$ 11,994	$  8,016	$  7,137
Portion of rents representative
of the interest factor	1,498	1,396	1,249	1,161	1,106
Fixed charges	$16,226	$17,142	$13,243	$  9,177	$  8,243
Ratio of earnings
to fixed charges	1.86	1.92	1.83	1.83	1.91

EX-13

1^st FRANKLIN FINANCIAL CORPORATION

ANNUAL REPORT

DECEMBER 31, 2008

TABLE OF CONTENTS
The Company	1
Chairman's Letter	2
Selected Consolidated Financial Information	3
Business	4
Management's Discussion and Analysis of Financial Condition and      Results of Operations	12
Report of Independent Registered Public Accounting Firm	21
Financial Statements	22
Directors and Executive Officers	42
Corporate Information	42
Ben F. Cheek, Jr.  Office of the Year	44

THE COMPANY

1^st Franklin Financial Corporation, a Georgia corporation, has been engaged in the consumer finance business since 1941, particularly in making direct cash loans and real estate loans.  As of December 31, 2008 the business was operated through 108 branch offices in Georgia, 39 in Alabama, 41 in South Carolina, 31 in Mississippi, 22 in Louisiana and 7 in Tennessee.  Also on that date, the Company had 1,113 employees.

As of December 31, 2008, the resources of the Company were invested principally in loans, which comprised 73% of the Company's assets.  The majority of the Company's revenues are derived from finance charges earned on loans and other outstanding receivables.  Our remaining revenues are derived from earnings on investment securities, insurance income and other miscellaneous income.

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To our Investors, Bankers, Co-Workers and Friends:

It has been a number of years since we have witnessed an economic downturn similar to the one that occurred in 2008.  Difficulties in the subprime mortgage market and a long suspected correction in the housing market seem to be the catalyst that fairly quickly moved us into a nationwide recession.  As you would expect, this has presented a number of new challenges for both the business community and the consuming public.  Hopefully, the actions being taken by the business community and the federal and state governments will prove to be the appropriate stimuli that will return our economy to a healthy and stable condition sooner rather than later.

Even though the slowing economy required some changes and adjustments during the year, 1^st Franklin Financial still achieved good results in all areas of our operation and had a very profitable year.  As you will note as you read the following pages, our net income for the year topped $10 million.  Loan originations reached almost $500 million and our net receivables grew slightly over 4%.  In addition, we continued the growth in our branch office network adding seven new offices in the state of Tennessee and three new offices in Louisiana.  With the expansion into Tennessee during 2008 1^st Franklin now has operating loan branches in six southeastern states.

As we all deal with the challenges and the unknown events that take place during economic recessions such as we are confronting today, we at 1^st Franklin are committed to staying true to our Core Values and to our Mission Statement which can be found on page 45 of this Annual Report.  Our company is in a strong financial position and our 1,000 plus co-workers are loyal, dedicated professionals who are determined that 1^st Franklin will remain one of the premier consumer finance companies in the southeastern United States.

To all of you who are our “partners” – our investors, our bankers, our customers and our other friends we extend our sincere thanks for the faith and confidence that you have placed in our company.  We truly look forward to sharing the many new opportunities that will be coming our way in the years ahead.

Very sincerely yours,                        

/s/ Ben F. Cheek. III

Ben F. Cheek, III                             

   Chairman of the Board and CEO            

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

Set forth below is selected consolidated financial information of the Company. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the more detailed financial statements and notes thereto included herein.

	Year Ended December 31
	2008	2007	2006	2005	2004
Selected Income Statement Data:	(In 000's, except ratio data)
Revenues	$ 138,610	$ 130,297	$ 115,042	$ 101,826	$ 98,459
Net Interest Income	83,484	75,669	69,632	64,387	61,541
Interest Expense	14,728	15,746	11,994	8,016	7,137
Provision for Loan Losses	25,725	21,434	19,109	19,484	18,097
Income Before Income Taxes	13,761	15,754	11,023	7,621	7,527
Net Income	10,665	12,205	7,672	5,109	4,981
Ratio of Earnings to   Fixed Charges	1.85	1.92	1.83	1.83	1.91
	As of December 31
	2008	2007	2006	2005	2004
Selected Balance Sheet Data:	(In 000's, except ratio data)
Net Loans	$ 285,580	$ 276,655	$ 249,862	$ 224,660	$ 218,893
Total Assets	389,422	402,454	362,567	324,910	312,366
Senior Debt	169,672	182,373	181,474	180,713	168,668
Subordinated Debt	86,605	91,966	67,190	38,902	41,311
Stockholders’ Equity	116,236	109,841	98,365	91,185	87,102
Ratio of Total Liabilities   to Stockholders’ Equity	2.35	2.66	2.69	2.56	2.59

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BUSINESS

References in this Annual Report to “1^st Franklin”, the “Company”, “we”, “our” and “us” refer to 1^st Franklin Financial Corporation and its subsidiaries.

1^st Franklin is engaged in the consumer finance business, particularly in making consumer loans to individuals in relatively small amounts for relatively short periods of time, and in making first and second mortgage loans on real estate in larger amounts and for longer periods of time.  We also purchase sales finance contracts from various retail dealers.  At December 31, 2008, direct cash loans comprised 87% of our outstanding loans, real estate loans comprised 7% and sales finance contracts comprised 6%.

In connection with our business, we also offer optional credit insurance coverage to our customers when making a loan.  Such coverage may include credit life insurance, credit accident and health insurance, and/or credit property insurance.  Customers may request credit life insurance coverage to help assure any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request accident and health insurance coverage to help continue loan payments if the customer becomes sick or disabled for an extended period of time.  Customers may also choose property insurance coverage to protect the value of loan collateral against damage, theft or destruction.  We write these various insurance products as an agent for a non-affiliated insurance company.  Under various agreeme nts, our wholly-owned insurance subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the insurance coverage on our customers written on behalf of this non-affiliated insurance company.

Earned finance charges generally account for the majority of our revenues.  The following table shows the sources of our earned finance charges over each of the past five years:

		Year Ended December 31
	2008		2007	2006	2005	2004
	(in thousands)
Direct Cash Loans	$85,392		$77,472	$68,358	$60,361	$56,364
Real Estate Loans	3,857		3,878	3,797	4,083	4,823
Sales Finance Contracts	5,186		5,814	5,759	4,785	4,882
Total Finance Charges	$94,435		$87,164	$77,914	$69,229	$66,069

We make direct cash loans primarily to people who need money for some unusual or unforeseen expense, for the purpose of debt consolidation or for the purchase of household goods such as furniture and appliances.  These loans are generally repayable in 6 to 60 monthly installments and generally do not exceed $10,000 in principal amount.  The loans are generally secured by personal property, motor vehicles and/or real estate. We believe that the interest and fees we charge on these loans are in compliance with applicable federal and state laws.

First and second mortgage loans on real estate are made to homeowners who wish to improve their property or who wish to restructure their financial obligations.  We generally make such loans in amounts from $3,000 to $50,000 and with maturities of 35 to 180 months. We believe that the interest and fees we charge on these loans are in compliance with applicable federal and state laws.

Sales finance contracts are purchased from retail dealers.  These contracts have maturities that generally range from 3 to 60 months and generally do not individually exceed $7,500 in principal amount. We believe that the interest rates we charge on these contracts are in compliance with applicable federal and state laws.

-#-

Our business consists mainly of making loans to salaried people and other wage earners who depend on their earnings to meet their repayment obligations.  Prior to the making of a loan, we complete a credit investigation to determine the income, existing indebtedness, length and stability of employment, and other relevant information concerning a potential customer.  In making most loans, we receive a security interest in the real or personal property of the borrower. In making direct cash loans, we focus on the customer's ability to repay his or her loan to us rather than on the potential value of the underlying security.

1^st Franklin competes with several national and regional finance companies, as well as a variety of local finance companies, in the communities we serve.  Competition is based primarily on interest rates and terms offered and on customer service, as well as, to some extent, reputation.  We believe that our emphasis on customer service helps us compete effectively in the markets we serve.

Because of our reliance on the continued income stream of most of our loan customers, our ability to continue the profitable operation of our business depends to a large extent on the continued employment of these people and their ability to meet their obligations as they become due. Therefore, a continuation of the current recession or significant increase in unemployment, or continued increases in the number of personal bankruptcies within our typical customer base, may have a material adverse effect on our collection ratios and profitability.

The average annual yield on loans we make (the percentage of finance charges earned to average net outstanding balance) has been as follows:

		Year Ended December 31
	2008		2007	2006	2005	2004
Direct Cash Loans	32.35%		32.28%	31.37%	31.61%	30.26%
Real Estate Loans	15.37		15.92	16.12	17.29	17.13
Sales Finance Contracts	20.52		20.35	20.61	18.96	19.35

The following table contains certain information about our operations:

		As of December 31
	2008		2007	2006	2005	2004
Number of Branch Offices	248		238	226	219	212
Number of Employees	1,113		1,057	1,007	964	989
Average Total Loans    Outstanding Per    Branch (in 000's)	$1,519		$1,515	$1,428	$1,347	$1,352
Average Number of Loans    Outstanding Per Branch	683		713	725	699	709

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DESCRIPTION OF LOANS

	Year Ended December 31
	2008	2007	2006	2005	2004
DIRECT CASH LOANS:
Number of Loans  Made to New Borrowers	30,871	33,354	34,188	29,332	45,251
Number of Loans Made to Former Borrowers	28,945	31,050	27,247	20,694	20,965
Number of Loans Made to Present Borrowers	133,902	132,251	126,905	122,261	105,824
Total Number of Loans Made	193,718	196,655	188,340	172,287	172,040
Total Volume of Loans Made (in 000’s)	$453,968	$441,462	$392,961	$348,620	$342,842
Average Size of Loan Made	$2,343	$2,245	$2,086	$2,023	$1,993
Number of Loans Outstanding	151,515	148,178	139,589	128,794	124,599
Total Loans Outstanding (in 000’s)	$324,996	$303,679	$267,999	$241,313	$229,044
Percent of Total Loans Outstanding	87%	84%	83%	82%	80%
Average Balance on Outstanding Loans	$2,145	$2,049	$1,920	$1,874	$1,838
REAL ESTATE LOANS:
Total Number of Loans Made	790	893	1,026	683	735
Total Volume of Loans Made (in 000’s)	$14,448	$14,924	$12,761	$8,018	$9,183
Average Size of Loan	$18,288	$16,713	$12,437	$11,739	$12,493
Number of Loans Outstanding	2,032	2,007	2,230	2,441	2,895
Total Loans Outstanding (in 000’s)	$24,176	$25,052	$23,564	$23,382	$26,989
Percent of Total Loans Outstanding	6%	7%	7%	8%	9%
Average Balance on Outstanding Loans	$11,897	$12,482	$10,567	$9,579	$9,323
SALES FINANCE CONTRACTS:
Number of Contracts Purchased	15,407	20,548	23,571	22,413	25,642
Total Volume of Contracts Purchased (in 000’s)	$30,909	$40,054	$43,471	$37,201	$41,489
Average Size of Contract Purchased	$2,006	$1,949	$1,844	$1,660	$1,618
Number of Contracts Outstanding	16,041	19,528	22,066	21,879	22,721
Total Contracts Outstanding (in 000’s)	$27,586	$31,747	$33,724	$30,346	$30,511
Percent of Total Loans Outstanding	7%	9%	10%	10%	11%
Average Balance on Outstanding Contracts	$1,720	$1,626	$1,528	$1,387	$1,343

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LOANS ACQUIRED, LIQUIDATED AND OUTSTANDING

Year Ended December 31
2008	2007	2006	2005	2004

(in thousands)

	LOANS ACQUIRED
Direct Cash Loans	$ 453,968	$ 441,462	$ 391,388	$ 348,501	$ 342,812
Real Estate Loans	14,448	14,924	12,568	8,018	9,183
Sales Finance Contracts	30,232	38,997	41,661	35,618	39,473
Net Bulk Purchases	677	1,057	3,576	1,702	2,046
Total Loans Acquired	$ 499,325	$ 496,440	$ 449,193	$ 393,839	$ 393,514
	LOANS LIQUIDATED
Direct Cash Loans	$ 432,651	$ 405,782	$ 366,275	$ 336,351	$ 325,001
Real Estate Loans	15,324	13,436	12,579	11,625	13,714
Sales Finance Contracts	35,070	42,031	40,093	37,366	37,656
Total Loans Liquidated	$ 483,045	$ 461,249	$ 418,947	$ 385,342	$ 376,371
	LOANS OUTSTANDING
Direct Cash Loans	$324,996	$303,679	$ 267,999	$ 241,313	$ 229,044
Real Estate Loans	24,176	25,052	23,564	23,382	26,989
Sales Finance Contracts	27,586	31,747	33,724	30,346	30,511
Total Loans Outstanding	$376,758	$360,478	$ 325,287	$ 295,041	$ 286,544
	UNEARNED FINANCE CHARGES
Direct Cash Loans	$ 33,273	$ 35,850	$ 31,374	$ 29,709	$ 28,795
Real Estate Loans	41	118	229	529	1,094
Sales Finance Contracts	4,058	4,753	5,013	4,423	4,454
Total Unearned Finance Charges	$ 37,372	$ 40,721	$ 36,616	$ 34,661	$ 34,343

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DELINQUENCIES

We classify delinquent accounts at the end of each month according to the number of installments past due at that time, based on the then-existing terms of the contract.  Accounts are classified in delinquency categories based on the number of days past due.  When three installments are past due, we classify the account as being 60-89 days past due; when four or more installments are past due, we classify the account as being 90 days or more past due.

In connection with any bankruptcy court initiated repayment plan, the Company effectively resets the delinquency rating of each account to coincide with the court initiated repayment plan.  Effectively, the account’s delinquency rating is changed going forward under normal grading parameters.

The following table shows the amount of certain classifications of delinquencies and the ratio of such delinquencies to related outstanding loans:

	Year Ended December 31
2008		2007	2006	2005	2004
(in thousands, except % data)

DIRECT CASH LOANS:
	60-89 Days Past Due	$ 7,247	$ 6,589	$ 5,598	$ 5,829	$ 4,594
	Percentage of Principal Outstanding	2.25%	2.19%	2.11%	2.44%	2.02%
	90 Days or More Past Due	$ 16,407	$ 13,100	$ 11,866	$11,206	$  7,290
	Percentage of Principal Outstanding	5.10%	4.36%	4.47%	4.70%	3.20%
REAL ESTATE LOANS:
	60-89 Days Past Due	$ 282	$ 179	$ 176	$ 350	$ 241
	Percentage of Principal Outstanding	1.19%	.73%	.76%	1.55%	.91%
	90 Days or More Past Due	480	452	522	$ 768	$ 689
	Percentage of Principal Outstanding	2.02%	1.84%	2.26%	3.39%	2.58%
SALES FINANCE CONTRACTS:
	60-89 Days Past Due	$ 518	$ 468	$ 581	$ 620	$ 556
	Percentage of Principal Outstanding	1.90%	1.48%	1.73%	2.05%	1.84%
	90 Days or More Past Due	$ 1,080	$ 1,089	$ 1,049	$ 1,060	$ 745
	Percentage of Principal Outstanding	3.96%	3.45%	3.13%	3.51%	2.46%

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LOSS EXPERIENCE

Net losses (charge-offs less recoveries) and the percent of such net losses to average net loans (loans less unearned finance charges) and to liquidations (payments, refunds, renewals and charge-offs of customers' loans) are shown in the following table:

	Year Ended December 31
2008		2007	2006	2005	2004
(in thousands, except % data)

	DIRECT CASH LOANS
Average Net Loans	$ 266,753	$ 242,576	$ 217,919	$ 195,563	$ 186,271
Liquidations	$432,651	$405,782	$366,275	$336,351	$325,001
Net Losses	$ 21,325	$ 17,812	$ 16,363	$ 16,074	$ 14,782
Net Losses as % of Average    Net Loans	7.99%	7.34%	7.51%	8.22%	7.94%
Net Losses as % of Liquidations	4.93%	4.39%	4.47%	4.78%	4.55%
	REAL ESTATE LOANS
Average Net Loans	$ 25,451	$ 25,015	$ 23,557	$ 24,403	$ 28,155
Liquidations	$ 15,324	$ 13,436	$ 12,579	$ 11,625	$ 13,714
Net Losses	$ (23)	$ 114	$ 65	$ 130	$ 205
Net Losses as % of Average     Net Loans	(.09%)	.46%	.28%	.53%	.73%
Net Losses as % of  Liquidations	(.15%)	.85%	.52%	1.12%	1.49%
	SALES FINANCE CONTRACTS
Average Net Loans	$ 25,486	$ 28,721	$ 27,950	$ 25,802	$ 25,236
Liquidations	$ 35,070	$ 42,031	$ 40,093	$ 37,366	$ 37,656
Net Losses	$ 1,448	$ 1,557	$ 1,481	$ 1,680	$ 1,339
Net Losses as % of Average     Net Loans	5.68%	5.42%	5.30%	6.51%	5.31%
Net Losses as % of  Liquidations	4.13%	3.70%	3.69%	4.50%	3.56%

ALLOWANCE FOR LOAN LOSSES

We determine the allowance for loan losses by reviewing our previous loss experience, reviewing specifically identified loans where collection is believed to be doubtful and evaluating the inherent risks and changes in the composition of our loan portfolio.  Such allowance is, in our opinion, sufficient to provide adequate protection against probable loan losses on the current loan portfolio.  

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SEGMENT FINANCIAL INFORMATION

For additional financial information about our segments, See Note 12 “Segment Financial Information” in the Notes to Consolidated Financial Statements.

CREDIT INSURANCE

We offer optional credit insurance coverage to our customers when making a loan.  Such coverage may include credit life insurance, credit accident and health insurance and/or credit property insurance.  Customers may request credit life insurance coverage to help assure any outstanding loan balance is repaid if the customer dies before the loan is repaid or they may request credit accident and health insurance coverage to help continue loan payments if the customer becomes sick or disabled for an extended period of time.  Customers may also choose property insurance coverage to protect the value of loan collateral against damage, theft or destruction.  We write these various insurance products as agent for a non-affiliated insurance company.  Under various agreements, our wholly-owned insurance s ubsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the insurance coverage on our customers written on behalf of this non-affiliated insurance company.

REGULATION AND SUPERVISION

State laws require that each office in which a small loan business is conducted be licensed by the state and that the business be conducted according to the applicable statutes and regulations.  The granting of a license depends on the financial responsibility, character and fitness of the applicant, and, where applicable, the applicant must show evidence of a need through convenience and advantage documentation.  As a condition to obtaining such license, the applicant must consent to state regulation and examination and to the making of periodic reports to the appropriate governing agencies.  Licenses are revocable for cause, and their continuance depends upon an applicant’s continued compliance with applicable laws and in connection with its receipt of a license.  The Company has never had any of its licenses revoked.

We conduct all of our lending operations under the provisions of the Federal Consumer Credit Protection Act (the "Truth-in-Lending Act"), the Fair Credit Reporting Act and the Federal Real Estate Settlement Procedures Act and other federal and state lending laws.  The Truth-in-Lending Act requires us to disclose to our customers the finance charge, the annual percentage rate, the total number and amount of payments and other material information on all loans.

A Federal Trade Commission ruling prevents us and other consumer lenders from using certain household goods as collateral on direct cash loans.  We collateralize such loans with non-household goods such as automobiles, boats and other exempt items.

We are also subject to state regulations governing insurance agents in the states in which we sell credit insurance.  State insurance regulations require that insurance agents be licensed and limit the premiums that insurance agents can charge.

Changes in the current regulatory environment, or the interpretation or application of current regulations, could impact our business.  While we believe that we are currently in compliance with all regulatory requirements, no assurance can be made regarding our future compliance or the cost thereof.

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SOURCES OF FUNDS

The Company is dependent upon the availability of various sources of funds in order to meet its ongoing financial obligations and to make new loans as a part of its business.  Our various sources of funds as a percent of total liabilities and stockholders’ equity and the number of persons investing in the Company's debt securities was as follows:

As of December 31
2008	2007	2006	2005	2004

Bank Borrowings	6%	4%	7%	3%	3%
Senior Debt	38	41	43	53	51
Subordinated Debt	22	23	19	12	13
Other Liabilities	4	5	4	4	5
Stockholders’ Equity	30	27	27	28	28
Total	100%	100%	100%	100%	100%
Number of Investors	5,508	5,820	5,868	6,011	6,517

As of March 26, 2009, all of our common stock was held by five related individuals and none of our common stock was traded in any established public trading market.  The Company does not maintain any equity compensation plans, and did not repurchase any of its equity securities in the fourth quarter of its most recent fiscal year.  Cash dividends of $21.95 and $8.56 per share were paid in 2008 and 2007, respectively, primarily for the purpose of enabling the Company’s shareholders to pay their income tax obligations, which arise as a result of the Company’s status as an S Corporation.  No other cash dividends were paid during the applicable periods.  For the foreseeable future, the Company expects to pay annual cash distributions equal to an amount sufficient to enable the Company’s sha reholders to pay their respective income tax obligations as a result of the Company’s status as an S Corporation.

The average interest rates we pay on borrowings, computed by dividing the interest paid by the average indebtedness outstanding, have been as follows:

	Year Ended December 31
2008		2007	2006	2005	2004

Senior Borrowings	4.78%	5.81%	4.95%	3.74%	3.25%
Subordinated Borrowings	6.27	6.34	5.18	3.97	4.22
All Borrowings	5.33	5.98	5.04	3.78	3.49

Certain financial ratios relating to our debt have been as follows:

	At December 31
2008		2007	2006	2005	2004

Total Liabilities to
Stockholders’ Equity	2.35	2.66	2.69	2.56	2.59
Unsubordinated Debt to
Subordinated Debt plus
Stockholders’ Equity	.92	.99	1.19	1.50	1.43

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis provides a narrative on the Company’s financial condition and performance.  The narrative reviews the Company’s results of operations, liquidity and capital resources, critical accounting policies and estimates, and certain other matters. It includes Management’s interpretation of our financial results, the factors affecting these results and the major factors expected to affect future operating results. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this Annual Report.

Certain information in this discussion and other statements contained in this Annual Report which are not historical facts may be forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties.  Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein.  Possible factors which could cause future results to differ from expectations include, but are not limited to, the ability to manage cash flow, the accuracy of Management’s estimates and judgments, adverse economic conditions including the interest rate environment, federal and state regulatory changes, unfavorable outcomes of litigation and other factors referenced in the “Risk Factors” sec tion of the Company’s Annual Report and elsewhere herein.

Overview:

We began fiscal year 2008 with the optimism of exceeding the record performance achieved in 2007.  However, as the year progressed, turmoil in the financial markets and the economic recession created formidable challenges for the Company.  During the second half of 2008, the global and national economies experienced some of the most volatile conditions seen in a generation.  As the recession deepened, growth in loan originations slowed and the number of non-performing loans increased.  In addition, highly publicized bank failures caused some of our investors to become concerned about the safety of their uninsured funds, resulting in a transfer of their funds to federally insured institutions.

Management closely monitored the potential economic perils and was proactive in making adjustments to the Company’s business processes.  As commodity prices rose and unemployment increased, the Company tightened loan underwriting criteria used to originate loans.  The Company increased the loan loss allowance during the year to cover an increase in probable loan losses inherent in the loan portfolio based on changing economic conditions.  In addition, the Company obtained additional funds maintained in its insurance subsidiaries to augment its liquidity position.  As a result of conservative business practices and diligent work by all our employees, the Company ended 2008 with the second most profitable year in its history.  Although not all performance goals were achieved, the Company had a solid year.  Our financial position continues to be sound.  

Expansion of the Company’s branch network continued during 2008 with the opening of seven new branches in the state of Tennessee.  In addition, expansion took place in Louisiana with the opening of three new branch offices.

Financial Condition:

At December 31, 2008 the Company had $389.4 million in total assets as compared to $402.5 million at December 31, 2007.  The $13 million (3%) decline in assets resulted from a $26.7 million (89%) decease in cash and cash equivalents during the current year.  Liquidity challenges have been a consequence of the aforementioned turmoil in the financial markets and the recessionary economy for many institutions, including the Company.  During 2008 the Company used cash reserves to fund its operations, including providing funds to allow it to address the aforementioned increase in redemptions of debt securities by investors.  

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All other categories of assets increased during 2008.  The Company had approximately $2.4 million and $2.2 million of cash in restricted accounts at December 31, 2008 and 2007, respectively.  These accounts were held by the Company’s insurance subsidiaries in order to meet the deposit requirements of the State of Georgia and to meet reserve requirements of its reinsurance agreements.

At the beginning of 2008, Management set a growth goal of 7.50% in net receivables (gross receivables less unearned finance charges).  Our actual growth was 4.06% for the year.  Tighter underwriting guidelines implemented by the Company on loan originations and lower loan demand due to the economy resulted in the slower growth.  The Company generated $499.3 million in loan originations during 2008 compared to $496.4 million in 2007.

The Company originates and services all its performing consumer loans.  There are no active loans packaged and brokered for sale to third parties.  All loans are made with fixed rates for fixed terms.  No variable rate loan products are offered by the Company.  Because the Company does not offer variable rate loan products, it does not believe it has material exposure to the certain of the issues currently being faced by certain lenders involved in sub-prime real estate mortgage lending.

Inherent in the loan portfolio are probable losses due to the inability of some customers to ultimately pay their obligations.  The creditworthiness of our loan portfolio is continually monitored and the Company maintains an allowance for loan losses to cover probable losses.  This allowance is shown as an off-setting account under our loan receivables category on the balance sheet.  We determine the amount of the allowance by reviewing our previous loss experience, reviewing specifically identified loans in which we believe collection is doubtful and evaluating the inherent risks and changes in the composition of our loan portfolio.  As a result of the increase in our loan portfolio and worsening economic conditions, we increased the allowance for loan losses to $23.0 million as of December 31, 20 08 compared to $20.0 million at December 31, 2007.  

Marketable debt securities increased $3.9 million (5%) at December 31, 2008 as compared to the prior year-end.  The majority of these investments are held by the Company’s insurance subsidiaries.  Management maintains what it believes to be a conservative approach when formulating its investment strategy.  The Company does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.  The investment portfolio consists mainly of U.S. Treasury bonds, government agency bonds and various municipal bonds.  Approximately 83% of these investment securities have been designated as “available for sale” with any unrealized gain or loss accounted for in the equity section of the Company’s balance s heet, net of deferred income taxes for those investments held by the insurance subsidiaries.  The remainder of the investment portfolio represents securities carried at amortized cost and designated “held to maturity”, as Management has both the ability and intent to hold these securities to maturity.

Other assets increased $.6 million (4%) at December 31, 2008 compared to the prior year-end.  Purchases of equipment and leasehold improvements associated with the aforementioned new branch offices opened and a number of office relocations were the primary reasons for the increase.  An increase in pre-paid expenses also contributed to the overall increase in other assets.

Senior and subordinated debt declined $18.1 million (7%) due to the aforementioned redemptions of the Company’s debt securities by certain investors who became concerned about instability in the financial markets and the deteriorating economy.  Additional borrowings against the Company’s available credit facility offset a portion of the redemptions of debt securities.

Each year Management provides an incentive bonus program for employees based on certain performance goals, such as net receivable growth, delinquency control, return on assets, profit, and expense to revenue ratios.  Annual performance goals are set at the beginning of each year and achievement of these goals determines the level of the total bonus payout.  Not all goals were achieved during 2008, thereby resulting in a lower accrual for payouts than 2007.  This was the primary factor causing accounts payable and accrued expenses to decline $1.4 million (7%) at December 31, 2008 compared the prior year-end.  Also contributing to the decrease was a reduction in accruals for profit sharing contributions.  Effective June 1, 2007, the Company changed from an employee 401(k)/Profit Sharing Plan to an employer match program.

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The first quarter of each year is typically the slowest in terms of loan originations generated by the Company.  Loan liquidations normally exceed new loans originated, resulting in a decline in loans outstanding.  This trend is expected to continue during the first quarter of 2009.

Results of Operations:

Although 2008 proved challenging, the Company continued to grow its loan and investment portfolios and record a profit.  Operating revenues were $138.6 million, $130.3 million and $115.0 million during 2008, 2007 and 2006, respectively.  The aforementioned growth in loans and investments during the two-year period ended December 31, 2008 resulted in higher finance charge income and increased insurance revenues.  The rate of growth in operating revenues between 2008 and 2007 was slower than the rate between 2007 and 2006.  This was due to the slower growth in the loan portfolio during the year just ended.

Net income was $10.7 million, $12.2 million and $7.7 million during 2008, 2007 and 2006, respectively.  The $1.5 million (13%) decline in net income during 2008 compared to 2007 was mainly due to the lower growth in operating revenues and to a significant increase in the 2008 loan loss provision and higher personnel cost.   A higher rate of growth in revenues during 2007 offset increases in expenses during that year resulting in higher net income.  

Net Interest Income:

Net interest income represents a performance metric which measures how successful the Company is in managing results of its investment and loan decisions compared to managing its debt.  It represents the difference between interest and finance charges earned on loans and investments and the interest paid on bank loans, debt securities and capital lease obligations.  Factors affecting the margin include the level of average net receivables and the interest income associated therewith, capitalized loan origination costs and average outstanding debt, as well as the general interest rate environment.   Volatility in interest rates has more impact on the income earned on investments and the Company’s borrowing costs than on interest income earned on loans.  Management does not normally change the rates charged on loans originated solely as a result of changes in the interest rate environment.

Net interest income was $83.5 million during 2008, compared to $75.7 million in 2007 and $69.6 million in 2006.  The higher margins achieved during 2008 and 2007 were mainly due to higher levels of net receivables outstanding and the associated finance charge income earned thereon.  Interest income increased $6.8 million (7%) during 2008 as compared to 2007 and $9.8 million (12%) during 2007 as compared to 2006.  

Average borrowings outstanding were $271.4 million, $254.3 million and $229.3 million during 2008, 2007 and 2006, respectively.  During the same periods, average borrowing costs were 5.33% and 5.98%, respectively, compared to 5.01% during 2006.   

Although average borrowings were higher during 2008 compared to 2007, a decline in our average cost of debt due to reductions in interest rates during 2008 resulted in a $1.0 million (6%) decline in interest expense during the year just ended, thereby contributing to the growth in the net margin.

The Company encountered significant increases in interest expense during 2007 compared to 2006.  Interest expense increased $3.8 million (31%) during 2007 compared to 2006.  This increase offset a portion of the growth in 2007’s net interest margin.  Factors responsible for the increases were the higher average borrowings outstanding and increases in interest rates.

Net Insurance Income:

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The Company offers optional credit insurance products to loan customers.  Growth in our loan portfolio typically leads to increases in insurance in-force as many of our loan customers elect to purchase the credit insurance coverage offered by the Company.  Increases in credit insurance in-force through our insurance subsidiaries caused net insurance income to increase $.6 million (2%) during 2008 compared to 2007, and $1.8 million (7%) during 2007 compared to 2006.  Higher insurance claims and expenses offset some of the increase in insurance income during the one-year period just ended.

Other Revenue:

In addition to the aforementioned credit insurance ancillary products, the Company also offers auto club memberships to its loan customers.  The Company began selling the memberships in October 2006, as an agent for a third-party provider.  Commissions earned on the sale of these memberships was the primary cause of the $.1 million (2%) increase in other revenue during 2008 compared to 2007, and the $2.9 million (135%) increase during 2007 as compared to 2006.  The significant increase in 2007 was due to the initial offering of this program to customers.

Provision for Loan Losses:

The Company’s provision for loan losses reflects the level of net charge-offs and adjustments to the allowance for loan losses to cover credit losses inherent in the outstanding loan portfolio at the balance sheet date.

As the economy deteriorated during 2008, increases in commodity prices, rising unemployment and a tightening of credit made it more difficult for certain customers to repay their credit obligations.  As a result, the Company experienced higher delinquencies and increased net charge offs. Net charge offs during 2008 were $22.8 million compared to $19.5 million during 2007.  In addition, the Company increased its reserve for loan losses to cover future losses inherent in the loan portfolio at December 31, 2008.  The Company also experienced increases in bankruptcy filings by its customers during the year.  The Company had $13.5 million in bankrupt accounts as of December 31, 2008.  As a result of the foregoing, the loan loss provision increased $4.3 million (20%) during 2008 as compared to 2007 .  

During 2007, nonperforming loans and net charge offs increased as compared to 2006.  Net charge offs were $19.5 million during 2007 compared to $17.9 million during 2006.  We also experienced an increase in bankruptcy filings by our customers during 2007.  The Company had $10.5 million in bankrupt accounts as of December 31, 2007.  As a result of these factors and the increase in our loan portfolio, the provision for loan losses increased $2.3 million (12%) during 2007.

Factors that could affect our loan loss reserve are continued increases in unemployment, increases in credit card delinquencies and continued worsening of economic conditions.

The creditworthiness of the loan portfolio is consistently monitored for factors such as previous loss experience, delinquency status, bankruptcy trends, the perceived ability of the borrower to repay, value of the underlying collateral and changes in the size of the loan portfolio.  Additions will be made to the allowance for loan losses when we deem it appropriate to protect against probable losses in the current portfolio.  Currently, we believe the allowance for loan losses is adequate to absorb actual losses.  However, if conditions change, future additions to the allowance may be necessary in order to provide adequate protection against probable losses in the current portfolio.

Other Operating Expenses:

Increases in the employee base, merit salary increases, payroll tax expense and higher claims expense associated with the Company’s self-insured employee health program caused personnel expense to increase $4.0 million (9%) during 2008 compared to 2007, and $2.4 million (6%) during 2007 compared to 2006.    Increased accruals for incentive bonuses and the cost to modify the Company’s profit sharing / 401(k) plan were additional factors contributing to the increase in personnel expense during 2007 compared to 2006.  Effective July 1, 2007, the Company converted its profit sharing / 401(k) plan to a new provider and began matching a portion of employees’ 401(k) plan contributions.  

The continued expansion of our branch operations had a direct impact on our occupancy expense.  Leases for new offices and lease renewals for existing offices were the main causes of the $.9 million (9%) and $.8 million (9%) increase in occupancy expense during 2008 and 2007, respectively.  Higher utility costs, maintenance costs and depreciation on furniture and equipment also contributed to the increases.

Generally higher levels of miscellaneous expenses including legal, audit, technology related, employee training and development and travel, were mainly responsible for the $1.3 million (8%) increase in other miscellaneous operating expenses during 2008 compared to the prior year.

During 2007, other operating expenses increased $.5 million (3%) as compared to 2006.  Increases in advertising, collection expenses, consulting fees, technology related expenses, travel expenses and securities sales expense were the main causes of the overall increase in other operating expenses.  Offsetting a portion of the 2007 increase was recognition of an insurance recovery of $.9 million.  The Company had been attempting to recover certain costs related to an ongoing lawsuit originally filed against the Company in 2002.  Although the Company has liability insurance in place, the Company had previously been unsuccessful in obtaining the reimbursement of any costs associated with defending the lawsuit from its insurance carrier.   In September 2007, the Company was successful in securing an agreement with the insurance company to reimburse us for the majority of the fees which have been incurred si nce the lawsuit was filed.

Income Taxes:

The Company has elected to be treated as an S Corporation for income tax reporting purposes.  Taxable income or loss of an S Corporation is included in the individual tax returns of the shareholders of the Company.  However, income taxes continue to be reported for the Company’s insurance subsidiaries, as they are not allowed to be treated as S Corporations, and for the Company’s state taxes in Louisiana, which does not recognize S Corporation status.  Deferred income tax assets and liabilities are recognized and provisions for current and deferred income taxes continue to be recorded by the Company’s subsidiaries.  The deferred income tax assets and liabilities are due to certain temporary differences between reported income and expenses for financial statement and income tax purpo ses.  

Effective income tax rates for the years ended December 31, 2008, 2007 and 2006 were 22.5%, 22.5% and 30.4%, respectively.  The lower rates during 2008 and 2007 were due to income of the S Corporation being passed to the shareholders for tax reporting, whereas income earned by the insurance subsidiaries was taxed at the corporate level.  Since the tax liability is passed on to the shareholders, upon consolidation, the profit of the S Corporation had the effect of lowering the overall consolidated tax rate.  During 2006, the S Corporation reported a loss, which had the effect of increasing the overall consolidated tax rate.

Quantitative and Qualitative Disclosures About Market Risk:

Volatility of market rates of interest can impact the Company’s investment portfolio and the interest rates paid on its debt securities.  Volatility in interest rates has more impact on the income earned on investments and the Company’s borrowing costs than on interest income earned on loans.  Management does not normally change the rates charged on loans originated solely as a result of changes in the interest rate environment. These exposures are monitored and managed by the Company as an integral part of its overall cash management program.  It is Management’s goal to minimize any adverse effect that movements in interest rates may have on the financial condition and operations of the Company.  The information in the table below summarizes the Company’s risk associated with m arketable debt securities and debt obligations as of December 31, 2008.  Rates associated with the marketable debt securities represent weighted averages based on the yield of each individual security.  No adjustment has been made to yield, even though many of the investments are tax-exempt.  For debt obligations, the table presents principal cash flows and related weighted average interest rates by contractual maturity dates.  As part of its risk management strategy, the Company does not invest a material amount in equity securities.  The Company’s subordinated debt securities offer various interest adjustment periods, at which time the interest rate resets, and which allow the holder to redeem that security prior to the contractual maturity without penalty.  It is expected that actual maturities on a portion of the Company’s subordinated debentures will occur prior to the contractual maturity as a result of interest rate resets.  Management estimates the carryin g value of senior and subordinated debt approximates their fair values when compared to instruments of similar type, terms and maturity.  

Loans are excluded from the information below since interest rates charged on loans are based on rates allowable in compliance with federal and state guidelines.  Management does not believe that changes in market interest rates will significantly impact rates charged on loans.  The Company has no exposure to foreign currency risk.

		Expected Year of Maturity
												2014 &		Fair
		2009		2010	2011			2012		2013		Beyond	Total	Value
Assets:		(in millions)
Marketable Debt Securities	$ 10		$ 9			$ 13	$ 12		$ 12		$ 26		$82	$82
Average Interest Rate	3.5%		3.7%			3.9%	4.0%		4.0%		3.9%		3.9%
Liabilities:
Senior Debt:
Senior Demand Notes	$41		—			—	—		—		—		$41	$41
Average Interest Rate	3.0%		—			—	—		—		—		3.0%
Commercial Paper	$106		—			—	—		—		—		$106	$106
Average Interest Rate	5.5%		—			—	—		—		—		5.5%
Notes Payable to Banks	$22		—			—	—		—		—		$  22	$ 22
Average Interest Rate	2.8%		—			—	—		—		—		2.8%
Subordinated Debentures	$   7		$  20			$ 31	$ 29		—		—		$ 87	$ 87
Average Interest Rate	5.5%		5.7%			6.2%	5.3%		—		—		5.9%

Liquidity and Capital Resources:

Liquidity is the ability of the Company to meet ongoing financial obligations, either through the collection of receivables or by generating additional funds through liability management. The Company’s liquidity is therefore dependent on the collection of its receivables, the sale of debt securities and the continued availability of funds under the Company’s revolving credit agreement (the “Revolver”).

We continue to review current economic conditions and their potential implications for us, including, among other things, loan losses, liquidity, compliance with our debt covenants, and relationships with our customers.

As of December 31, 2008 and December 31, 2007, the Company had $3.2 million and $29.8 million, respectively, invested in cash and short-term investments readily convertible into cash with original maturities of three months or less.  As previously mentioned, the Company used cash reserves to fund its operations, including providing funds for an increase in redemptions of debt securities by investors.

The Company's investments in marketable securities can be converted into cash, if necessary.  As of December 31, 2008 and 2007, 96% of the Company's cash and cash equivalents and investment securities were maintained in the Company’s insurance subsidiaries.  State insurance regulations limit the use an insurance company can make of assets.  Ordinary dividend payments to the Company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries.  Any dividends above the state limitations are termed “extraordinary dividends” and must be approved in advance by the Georgia Insurance Commissioner.  Pri or to 2008, no dividends had been paid by the insurance subsidiaries since the Company elected in 1996 to be treated as an S Corporation for IRS reporting.  Due to the volatility of the economy, Management elected to pay dividends during 2008 to strengthen the Company’s liquidity position in light of general economic conditions.  During 2008 the Company received in aggregate $8.9 million in ordinary dividends from its insurance subsidiaries.  In October 2008, the Company filed a request with the Georgia Insurance Commissioner that its insurance subsidiaries be allowed to pay up to $35.0 million in extraordinary dividends on or before December 31, 2008.  The request was approved and, in December 2008, a total of $20.0 million of the approved $35.0 million in extraordinary dividends were paid by the insurance subsidiaries to the Company.

At December 31, 2008, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $28.7 million and $30.7 million, respectively.  Since ordinary dividends were paid at the end of 2008, the Company’s insurance subsidiaries are not eligible to pay such dividends in 2009.  In light of the current economic climate and the Company’s desire to ensure adequate liquidity, in the first quarter of 2009 the Company filed a request with the Georgia Insurance Department for the insurance subsidiaries to pay up to $45.0 million in extraordinary dividends during 2009.  If approved, Management would pay the dividends in the event funds were needed for operations and such funds were not available from sales of the Company’s debt securities and/or its credit line facility.  The Company expects a ruling on its request on or before April 30, 2009.

Most of the Company's loan portfolio is financed through sales of its various debt securities, which, because of certain redemption features, have a shorter average maturity than the loan portfolio as a whole.  The difference in maturities may adversely affect liquidity if the Company is not able to continue to sell debt securities at interest rates and on terms that are responsive to the demands of the marketplace or maintain sufficient borrowing availability under our credit facility.

In addition to funding our liquidity requirements through the sales of debt securities, the Company maintains an external source of funds through its Revolver with Wachovia Bank, N.A. (a Wells Fargo Company) and BMO Capital Markets Financing, Inc., which provides for unsecured borrowings up to $50.0 million, subject to certain limitations.  This agreement expires December 15, 2009, and any amounts then outstanding will be due and payable on such date.  Management believes continued growth of the Company is contingent on the continued sale of its debt securities and the availability of funding from third-party lenders.  Management has begun the process of negotiating a new line of credit with the intention that such line of credit would contain additional funds availability.  It is the Company’ ;s intention that any such new credit facility would be substantially finalized during the second quarter of 2009.  In the event a new credit facility is not approved, Management expects that it would attempt to utilize the previously mentioned extraordinary dividends available from the Company’s insurance subsidiaries to assist in funding the Company’s operations.  There can be no assurances that the Company will be able to negotiate or obtain third party bank financing in a timely manner or on terms acceptable to Management, or at all.  Additionally, there can be no assurances that the Georgia Insurance Commissioner would authorize the Company’s insurance subsidiaries to pay such extraordinary dividends at times, or in amounts sufficient, to fund the Company’s operations.  In either event, the Company’s financial condition and results of operations could be materially adversely affected.

Available but unborrowed amounts under the Revolver are subject to a periodic unused line fee, the percentage and amount of which is dependent on the then-outstanding amounts under the Revolver.  The interest rate under the Revolver is equivalent to either (a) the base rate (which equals the higher of the Prime Rate or 0.5% above the Federal Funds Rate, each as defined) or (b) the London Inter-bank Offered Rate (“LIBOR”) determined on an interest period of 1-month, 2-months, 3-months or 6-months, at the option of the Company, plus, in each case, an Applicable Margin (as defined).  Base rate borrowings may be converted to LIBOR borrowings, and vice versa, at the option of the Company.  As of December 31, 2008, $22.3 million was outstanding under the Revolver at an interest rate of 2.75%, and available borrowings under the Revolver were $27.7 million.  Periodic funding of amounts available under the Revol ver is subject to conditions customary for financing transactions of this nature, including compliance with various debt covenants.  The Company has no reason to believe that it will not remain in compliance with these covenants and obligations for the foreseeable future.

We are not aware of any additional restrictions placed on us, or being considered to be placed on us, related to our ability to access capital, such as borrowings under our Revolver prior to its maturity.

The credit agreement governing the Revolver requires the Company to comply with certain covenants customary for financing transactions of this nature, including, among others, maintaining a minimum interest coverage ratio, a minimum consolidated tangible net worth ratio, and a maximum debt to tangible net worth ratio, each as defined. The Company must also comply with certain restrictions on its activities consistent with credit facilities of this type, including limitations on: (a) restricted payments; (b) additional debt obligations (other than specified debt obligations); (c) investments (other than specified investments); (d) mergers, acquisitions, or a liquidation or winding up; (e) modifying its organizational documents or changing lines of business; (f) modifying Material Contracts (as defined); (g) certain af filiate transactions; (h) sale-leaseback, synthetic lease, or similar transactions; (i) guaranteeing additional indebtedness (other than specified indebtedness); (k) capital expenditures; or (l) speculative transactions.  The credit agreement governing the Revolver also restricts the Company or any of its subsidiaries from creating or allowing certain liens on their assets, entering into agreements that restrict their ability to grant liens (other than specified agreements), or creating or allowing restrictions on any of their ability to make dividends, distributions, inter-company loans or guaranties, or other inter-company payments, or inter-company asset transfers.  At December 31, 2008, the Company was in compliance with all covenants.

The Company was subject to the following contractual obligations and commitments at December 31, 2008:

					2014 &
2009	2010	2011	2012	2013	Beyond	Total

(in millions)

Contractual Obligations:
Credit Line *	$  21.3	$     -	$      -	$     -	$     -	$      -	$ 21.3
Bank Commitment Fee **	.1	-	-	-	-	-	.1
Senior Demand Notes *	42.5	-	-	-	-	-	42.5
Commercial Paper *	108.0	-	-	-	-	-	108.0
Subordinated Debt *	8.4	24.7	38.4	35.3	-	-	106.8
Human resource insurance and support contracts **	.5	.1	.1	-	-	-	.7
Operating leases (offices)	4.0	3.5	2.5	1.6	.7	-	12.3
Operating leases (equipment)	.1	-	-	-	-	-	.1
Software service contract **	2.4	2.4	2.4	2.4	2.4	14.3	26.3
Total	$187.3	$30.7	$43.4	$39.3	$ 3.1	$14.3	$318.1
							;
* Includes estimated interest at current rates.
** Based on current usage.

The increase in the loan loss allowance 2008 also did not directly affect liquidity as the allowance is maintained out of income; however, an increase in the actual loss rate may have a material adverse effect on the Company’s earnings.  The inability to collect loans could eventually impact the Company’s liquidity in the future.

Critical Accounting Policies:

The accounting and reporting policies of 1^st Franklin and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the financial services industry.  The more critical accounting and reporting policies include the allowance for loan losses, revenue recognition and insurance claims reserves.

Allowance for Loan Losses:

The allowance for loan losses is based on the Company's previous loss experience, a review of specifically identified loans where we believe collection is doubtful and Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio.  Specific provision for loan losses is made for impaired loans based on a comparison of the recorded carrying value in the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated fair value of the underlying collateral.

Revenue Recognition:

Accounting principles generally accepted in the United States require that an interest yield method be used to calculate the income recognized on accounts which have precomputed charges.  An interest yield method is used by the Company on each individual account with precomputed charges to calculate income for those on-going accounts; however, state regulations often allow interest refunds to be made according to the “Rule of 78's” method for payoffs and renewals.  Since the majority of the Company's accounts which have precomputed charges are paid off or renewed prior to maturity, the result is that most of the those accounts effectively yield on a Rule of 78's basis.

Precomputed finance charges are included in the gross amount of certain direct cash loans, sales finance contracts and certain real estate loans.  These precomputed charges are deferred and recognized as income on an accrual basis using the effective interest method.  Some other cash loans and real estate loans, which do not have precomputed charges, have income recognized on a simple interest accrual basis.  Income is not accrued on a loan that is more than 60 days past due.

Loan fees and origination costs are deferred and recognized as an adjustment to the loan yield over the contractual life of the related loan.  

The property and casualty credit insurance policies written by the Company, as agent for a non-affiliated insurance company, are reinsured by the Company’s property and casualty insurance subsidiary.  The premiums are deferred and earned over the period of insurance coverage using the pro-rata method or the effective yield method, depending on whether the amount of insurance coverage generally remains level or declines.

The credit life and accident and health policies written by the Company, as agent for a non-affiliated insurance company, are also reinsured by the Company’s life insurance subsidiary.  The premiums are deferred and earned using the pro-rata method for level-term life policies and the effective yield method for decreasing-term life policies.  Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method.

Insurance Claims Reserves:

Included in unearned insurance premiums and commissions on the consolidated statements of financial position are reserves for incurred but unpaid credit insurance claims for policies written by the Company and reinsured by the Company’s wholly-owned insurance subsidiaries.  These reserves are established based on accepted actuarial methods.  In the event that the Company’s actual reported losses for any given period are materially in excess of the previously estimated amounts, such losses could have a material adverse affect on the Company’s results of operations.

Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations.

New Accounting Pronouncements:

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, (“SFAS No.157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new assets or liabilities to be measured at fair value.  SFAS No. 157 became effective for the Company in 2008.  The adoption of this new accounting principle did not have a material effect on its financial position, results of operations or cash flows but did result in additional disclosure in the footnotes to the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115,” (“SFAS No. 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value.  SFAS No. 159 became effective for the Company in 2008 and the adoption did not have an impact on our consolidated statements, as we did not elect the fair value option for any specific financial instruments or other items.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To:

The Board of Directors

1^st Franklin Financial Corporation

We have audited the accompanying consolidated statements of financial position of 1^st Franklin Financial Corporation and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting t he amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of 1^st Franklin Financial Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

March 27, 2009

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1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2008 AND 2007

ASSETS

2008    2007 

CASH AND CASH EQUIVALENTS (Note 5):
Cash and Due From Banks		$ 433,645	$ 3,716,343
Short-term Investments		2,726,781	26,114,786
		3,160,426	29,831,129
RESTRICTED CASH (Note 1)		2,366,779	2,187,022
LOANS (Note 2):
Direct Cash Loans		324,996,394	303,678,240
Real Estate Loans		24,175,593	25,052,160
Sales Finance Contracts		27,586,508	31,747,131
		376,758,495	360,477,531
Less:	Unearned Finance Charges	44,032,487	40,720,500
	Unearned Insurance Premiums	24,135,983	23,066,730
	Allowance for Loan Losses	23,010,085	20,035,085
		285,579,940	276,655,216
MARKETABLE DEBT SECURITIES (Note 3):
Available for Sale, at fair market value		67,883,686	60,060,798
Held to Maturity, at amortized cost		14,127,792	18,021,418
		82,011,478	78,082,216
OTHER ASSETS:
Land, Buildings, Equipment and Leasehold Improvements,
less accumulated depreciation and amortization
of $13,653,028 and $12,383,615 in 2008          and 2007, respectively		9,241,725	8,926,207
Deferred Acquisition Costs		1,360,237	1,302,859
Due from Non-affiliated Insurance Company		1,753,638	1,975,006
Miscellaneous		3,948,218	3,493,980
		16,303,818	15,698,052
TOTAL ASSETS		$ 389,422,441	$ 402,453,635
See Notes to Consolidated Financial Statements

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1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2008 AND 2007

LIABILITIES AND STOCKHOLDERS' EQUITY

2008   2007 

SENIOR DEBT (Note 6):
Notes Payable to Banks	$ 22,267,681	$ 16,684,681
Senior Demand Notes, including accrued interest	41,341,839	48,610,737
Commercial Paper	106,062,799	117,077,531
	169,672,319	182,372,949
ACCOUNTS PAYABLE AND ACCRUED EXPENSES	16,908,641	18,274,446
SUBORDINATED DEBT (Note 7)	86,605,009	91,965,714
Total Liabilities	273,185,969	292,613,109
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value
6,000 shares authorized; no shares outstanding	--	--
Common Stock:
Voting Shares; $100 par value;
2,000 shares authorized; 1,700 shares outstanding as of December 31, 2008 and 2007	170,000	170,000
Non-Voting Shares; no par value;
198,000 shares authorized; 168,300 shares
outstanding as of December 31, 2008 and 2007	--	--
Accumulated Other Comprehensive Income	433,101	970,603
Retained Earnings	115,633,371	108,699,923
Total Stockholders' Equity	116,236,472	109,840,526
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 389,422,441	$ 402,453,635
See Notes to Consolidated Financial Statements

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1st FRANKLIN FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
	2008	2007	2006
INTEREST INCOME: Finance Charges Investment Income	$ 94,434,623    3,777,325    98,211,948	$ 87,164,381    4,250,314    91,414,695	$ 77,914,247    3,710,980    81,625,227
INTEREST EXPENSE: Senior Debt Subordinated Debt	8,333,678    6,393,999    14,727,677	10,158,113    5,587,502    15,745,615	8,875,312    3,118,314    11,993,626
NET INTEREST INCOME	83,484,271	75,669,080	69,631,601
PROVISION FOR LOAN LOSSES (Note 2)	25,725,394	21,433,742	19,108,562
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	57,758,877	54,235,338	50,523,039
NET INSURANCE INCOME: Premiums Insurance Claims and Expense	35,190,622    (7,940,655)   27,249,967	33,798,963    (7,160,494)   26,638,469	31,256,387    (6,416,995)   24,839,392
OTHER REVENUE	5,207,553	5,083,587	2,160,753
OPERATING EXPENSES: Personnel Expense Occupancy Expense Other Expense	46,830,271    10,653,752    18,971,151    76,455,174	42,798,905    9,778,649    17,626,181    70,203,735	40,378,370    8,979,037    17,143,101    66,500,508
INCOME BEFORE INCOME TAXES	13,761,223	15,753,659	11,022,676
PROVISION FOR INCOME TAXES (Note 11)	3,096,447	3,548,896	3,350,914
NET INCOME	$ 10,664,776	$ 12,204,763	$ 7,671,762
BASIC EARNINGS PER SHARE: 170,000 Shares Outstanding for All Periods ( 1,700 voting, 168,300 non-voting)	$62.73	$71.79	$45.13
See Notes to Consolidated Financial Statements

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1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

			Accumulated
			Other
Common Stock		Retained	Comprehensive
Shares	Amount	Earnings	Income	Total

Balance at December 31, 2005	170,000	$170,000	90,746,492	268,012	91,184,504
Comprehensive Income:
Net Income for 2006	—	—	7,671,762	—
Net Change in Unrealized Gain           On Available-For-Sale Securities	—	—	—	(24,207)
Total Comprehensive Income	—	—	—	—	7,647,555
Cash Distributions Paid	—	—	(467,501)	—	(467,501)
Balance at December 31, 2006	170,000	170,000	97,950,753	243,805	98,364,558
Comprehensive Income:
Net Income for 2007	—	—	12,204,763	—
Net Change in Unrealized Gain           On Available-For-Sale Securities	—	—	—	726,798
Total Comprehensive Income	—	—	—	—	12,931,561
Cash Distributions Paid	—	—	(1,455,593)	—	(1,455,593)
Balance at  December 31, 2007	170,000	170,000	108,699,923	970,603	109,840,526
Comprehensive Income:
Net Income for 2008	—	—	10,664,776	—
Net Change in Unrealized Gain           On Available-For-Sale Securities	—	—	—	(537,502)
Total Comprehensive Income	—	—	—	—	10,127,274
Cash Distributions Paid	—	—	(3,731,328)	—	(3,731,328)
Balance at December 31, 2008	170,000	$170,000	$115,633,371	$   433,101	$116,236,472
Disclosure of reclassification amount:			2008	2007	2006
Unrealized holding gains (losses) arising during period, net of applicable income tax (provision) benefits of $10,512 (205,290) and $54,772 for 2008, 2007 and 2006, respectively
			$    (525,701)	$    727,554	$    (17,527)
Less: Reclassification adjustment for net gains (losses) included in income, net of applicable income taxes of $3,095, $251 and $2,471 for 2008, 2007 and 2006, respectively			11,801	756	6,680
Net unrealized gains (losses) on securities, net of applicable income tax (provision) benefits of $13,607, ($205,039) and $57,243 for 2008, 2007 and 2006, respectively			$    (537,502)	$    726,798	$    (24,207)

See Notes to Consolidated Financial Statements

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 1^st FRANKLIN FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

  2008    2007    2006 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income	$ 10,664,776	$ 12,204,763	$ 7,671,762
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses	25,725,394	21,433,742	19,108,562
Depreciation and amortization	2,447,007	2,076,784	1,888,433
Provision for deferred taxes	155,830	251,823	286,851
Losses due to called redemptions on marketable securities, loss on sales of equipment and
amortization on securities	263,242	120,291	7,205
Increase in Miscellaneous Assets and other	(290,247)	(93,905)	(698,492)
Increase (decrease) in Other Liabilities	(1,508,028)	2,278,834	1,198,375
Net Cash Provided	37,457,974	38,272,332	29,462,696
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated or purchased	(236,634,867)	(250,121,741)	(231,849,878)
Loan payments	201,984,749	201,895,210	187,538,632
Increase in restricted cash	(179,757)	(317,439)	(277,616)
Purchases of securities, available for sale	(27,465,879)	(17,692,694)	(9,537,168)
Purchases of securities, held to maturity	(1,202,870)	--	--
Redemptions of securities, available for sale	18,813,950	10,483,100	5,778,000
Redemptions of securities, held to maturity	5,101,000	3,005,000	1,995,000
Capital expenditures	(2,777,574)	(4,383,965)	(2,089,399)
Proceeds from sale of equipment	25,234	443,450	438,439
Net Cash Used	(42,336,014)	(56,689,079)	(48,003,990)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Notes Payable to
Banks and Senior Demand Notes	(1,685,898)	(8,384,074)	540,921
Commercial Paper issued	35,766,727	33,538,927	44,177,066
Commercial Paper redeemed	(46,781,459)	(24,256,208)	(43,956,538)
Subordinated Debt issued	21,619,938	36,790,393	35,526,664
Subordinated Debt redeemed	(26,980,643)	(12,014,336)	(7,238,642)
Dividends / Distributions paid	(3,731,328)	(1,455,593)	(467,501)
Net Cash (Used) Provided	(21,792,663)	24,219,109	28,581,970
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS	(26,670,703)	5,802,362	10,040,676
CASH AND CASH EQUIVALENTS, beginning	29,831,129	24,028,767	13,988,091
CASH AND CASH EQUIVALENTS, ending	$ 3,160,426	$ 29,831,129	$ 24,028,767

Cash paid during the year for:	Interest	$ 14,830,353	$ 15,667,174	$ 11,694,753
	Income Taxes	2,972,200	3,316,208	3,137,391
See Notes to Consolidated Financial Statements

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1^ST FRANKLIN FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business:

1^st Franklin Financial Corporation (the "Company") is a consumer finance company which originates and services direct cash loans, real estate loans and sales finance contracts through 248 branch offices located throughout the southeastern United States.  (See inside back cover of this Annual Report for branch office locations.)  In addition to this business, the Company writes credit insurance when requested by its loan customers as an agent for a non-affiliated insurance company specializing in such insurance.  Two of the Company's wholly owned subsidiaries, Frandisco Life Insurance Company and Frandisco Property and Casualty Insurance Company, reinsure the credit life, the credit accident and health and the credit property insurance so written.

Basis of Consolidation:

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  Inter-company accounts and transactions have been eliminated.

Fair Values of Financial Instruments:

The following methods and assumptions are used by the Company in estimating fair values for financial instruments:

Cash and Cash Equivalents.  Cash includes cash on hand and with banks.  Cash equivalents are short-term highly liquid investments with original maturities of three months or less.  The carrying value of cash and cash equivalents approximates fair value due to the relatively short period of time between the origination of the instruments and their expected realization.

Loans.  The fair value of the Company's direct cash loans and sales finance contracts approximate the carrying value since the estimated life, assuming prepayments, is short-term in nature.  The fair value of the Company's real estate loans approximate the carrying value since the interest rate charged by the Company approximates market rates.

Marketable Debt Securities.  The fair value for marketable debt securities is based on quoted market prices.  If a quoted market price is not available, fair value is estimated using market prices for similar securities.  See Note 3 for the fair value of marketable debt securities and Note 4 for information related to how these securities are valued.

Senior Debt.  The carrying value of the Company's senior debt securities approximate fair value due to the relatively short period of time between the origination of the instruments and their expected payment.

Subordinated Debt.  The carrying value of the Company's subordinated debt approximates fair value due to the re-pricing frequency of the securities.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could vary from these estimates; however, in the opinion of Management, such variances would not be material.

-#-

Income Recognition:

Accounting principles generally accepted in the United States require that an interest yield method be used to calculate the income recognized on accounts which have precomputed charges.  An interest yield method is used by the Company on each individual account with precomputed charges to calculate income for those on-going accounts, however, state regulations often allow interest refunds to be made according to the “Rule of 78's” method for payoffs and renewals.  Since the majority of the Company's accounts with precomputed charges are paid off or renewed prior to maturity, the result is that most of the accounts with precomputed charges effectively yield on a Rule of 78's basis.

Precomputed finance charges are included in the gross amount of certain direct cash loans, sales finance contracts and certain real estate loans.  These precomputed charges are deferred and recognized as income on an accrual basis using the effective interest method.  Some other cash loans and real estate loans, which do not have precomputed charges, have income recognized on a simple interest accrual basis.  Income is not accrued on a loan that is more than 60 days past due.

Loan fees and origination costs are deferred and recognized as an adjustment to the loan yield over the contractual life of the related loan.  

The property and casualty credit insurance policies written by the Company are reinsured by the Company’s property and casualty insurance subsidiary.  The premiums are deferred and earned over the period of insurance coverage using the pro-rata method or the effective yield method, depending on whether the amount of insurance coverage generally remains level or declines.

The credit life and accident and health policies written by the Company are reinsured by the Company’s life insurance subsidiary.  The premiums are deferred and earned using the pro-rata method for level-term life policies and the effective yield method for decreasing-term life policies.  Premiums on accident and health policies are earned based on an average of the pro-rata method and the effective yield method.

Claims of the insurance subsidiaries are expensed as incurred and reserves are established for incurred but not reported (IBNR) claims.  Reserves for claims totaled $932,973 and $938,475 at December 31, 2008 and 2007, respectively, and are included in unearned insurance premiums on the balance sheet.

Policy acquisition costs of the insurance subsidiaries are deferred and amortized to expense over the life of the policies on the same methods used to recognize premium income.

Commissions received from the sale of auto club memberships are earned at the time the membership is sold.  The Company sells the memberships as an agent for a third party.  The Company has no further obligations after the date of sale as all claims for benefits are paid and administered by the third party.

Depreciation and Amortization:

Office machines, equipment (including equipment and capital leases) and Company automobiles are recorded at cost and depreciated on a straight-line basis over a period of three to ten years.  Leasehold improvements are amortized on a straight-line basis over five years or less depending on the term of the applicable lease.  Depreciation and amortization expense for the three years ended December 31, 2008 was $2,447,006, $2,076,784 and $1,888,433, respectively.

Restricted Cash:

At December 31, 2008, 2007 and 2006, the Company had cash of $2,366,779, $2,187,022 and $1,869,583, respectively, that was held in restricted accounts at its insurance subsidiaries in order to meet the deposit requirements of the State of Georgia and to meet the reserve requirements of its reinsurance agreements.  

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Impairment of Long-Lived Assets:

The Company annually evaluates whether events and circumstances have occurred or triggering events have occurred that indicate the carrying amount of property and equipment may warrant revision or may not be recoverable.  When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition.  In Management's opinion, there has been no impairment of carrying value of the long-lived assets, including property and equipment and other intangible assets, at December 31, 2008.

Income Taxes:

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB No. 109, Accounting for Income Taxes.  FIN 48 clarifies the accounting for income taxes by prescribing how companies should recognize, measure, present and disclose uncertain tax positions that have been taken on a tax return.  The Company adopted FIN 48 as of January 1, 2007, as required. There was no material impact from the adoption of FIN 48 on the Company’s consolidated financial statements.  

No provision for income taxes has been made by the Company since it has elected to be treated as an S Corporation. However, the state of Louisiana does not recognize S Corporations, and the Company has accrued amounts necessary to pay the required income taxes in such state. The Company’s insurance subsidiaries remain taxable and income taxes are provided for where applicable (Note 11).

Collateral Held for Resale:

When the Company takes possession of the collateral which secures a loan, the collateral is recorded at the lower of its estimated resale value or the loan balance.  Any losses incurred at that time are charged against the Allowance for Loan Losses.

Marketable Debt Securities:  

Management has designated a significant portion of the marketable debt securities held in the Company's investment portfolio at December 31, 2008 and 2007 as being available-for-sale.  This portion of the investment portfolio is reported at fair market value with unrealized gains and losses excluded from earnings and reported, net of taxes, in accumulated other comprehensive income, which is a separate component of stockholders' equity.  Gains and losses on sales of securities available-for-sale are determined based on the specific identification method.  The remainder of the investment portfolio is carried at amortized cost and designated as held-to-maturity as Management has both the ability and intent to hold these securities to maturity.

Earnings per Share Information:

The Company has no contingently issuable common shares, thus basic and diluted per share amounts are the same.

2.

LOANS

The Company's consumer loans are made to individuals in relatively small amounts for relatively short periods of time.  First and second mortgage loans on real estate are made in larger amounts and for longer periods of time.  The Company also purchases sales finance contracts from various dealers.  All loans and sales contracts are held for investment.

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Contractual Maturities of Loans:

An estimate of contractual maturities stated as a percentage of the loan balances based upon an analysis of the Company's portfolio as of December 31, 2008 is as follows:

	Direct		Real	Sales
Due In	Cash		Estate	Finance
Calendar Year	Loans		Loans	Contracts
2009	64.46%	19.34%		59.49%
2010	28.90	19.31		27.53
2011	5.35	17.08		9.99
2012	.89	13.78		2.55
2013	.18	9.76		.31
2014 & beyond	.22	20.73		.13
	100.00%	100.00%		100.00%

Historically, a majority of the Company's loans have renewed many months prior to their final contractual maturity dates, and the Company expects this trend to continue in the future.  Accordingly, the above contractual maturities should not be regarded as a forecast of future cash collections.

Cash Collections on Principal:

During the years ended December 31, 2008 and 2007, cash collections applied to the principal of loans totaled $201,984,749 and $201,895,210, respectively, and the ratios of these cash collections to average net receivables were 63.58% and 68.14%, respectively.

Allowance for Loan Losses:

The Allowance for Loan Losses is based on the Company's previous loss experience, a review of specifically identified loans where we believe collection is doubtful and Management's evaluation of the inherent risks and changes in the composition of the Company's loan portfolio.  Such allowance is, in the opinion of Management, sufficiently adequate for probable losses in the current loan portfolio.  Specific provision for loan losses is made for impaired loans based on a comparison of the recorded carrying value in the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated fair value of the underlying collateral.  As the estimates used in determining the loan loss reserve are influenced by outside factors, such as consumer payment patt erns and general economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that the estimates of underlying loss amounts could change.

When a loan becomes five installments past due, it is charged off unless Management directs that it be retained as an active loan. In making this charge off evaluation, Management considers factors such as pending insurance, bankruptcy status and other measures of collectability.  In addition, no installment is counted as being past due if at least 80% of the contractual payment has been paid.  The amount charged off is the unpaid balance less the unearned finance charges and the unearned insurance premiums.

The Company held $35,301,198 and $30,429,562 of loans in a non-accrual status at December 31, 2008 and 2007, respectively.

An analysis of the allowance for loan losses for the years ended December 31, 2008, 2007 and 2006 is shown in the following table:

	2008	2007	2006
Beginning Balance	$ 20,035,085	$ 18,085,085	$ 16,885,085
Provision for Loan Losses	25,725,394	21,433,742	19,108,562
Charge-Offs	(29,231,988)	(25,101,040)	(23,115,442)
Recoveries	6,481,594	5,617,298	5,206,880
Ending Balance	$23,010,085	$20,035,085	$18,085,085

3.

MARKETABLE DEBT SECURITIES

Debt securities available for sale are carried at estimated fair market value.  The amortized cost and estimated fair market values of these debt securities are as follows:

	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Market Value
December 31, 2008
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies	$  --	$ --	$ --	$  --
Obligations of states and
political subdivisions	67,258,945	699,997	(449,030)	67,509,912
Corporate securities	130,316	243,458	--	373,774
	$ 67,389,261	$ 943,455	$ (449,030)	$ 67,883,686

December 31, 2007
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies	$  9,015,878	$ 82,388	$ (16,646)	$  9,081,620
Obligations of states and
political subdivisions	49,869,070	335,089	(119,362)	50,084,797
Corporate securities	130,316	764,065	--	894,381
	$ 59,015,264	$ 1,181,542	$ (136,008)	$ 60,060,798

Debt securities designated as "Held to Maturity" are carried at amortized cost based on Management's intent and ability to hold such securities to maturity.  The amortized cost and estimated fair market values of these debt securities are as follows:

	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Market Value
December 31, 2008
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies	$ 1,498,335	$ 24,707	$ --	$ 1,523,042
Obligations of states and
political subdivisions	12,629,457	194,492	(26,045)	12,797,904
	$ 14,127,792	$ 219,199	$ (26,045)	$ 14,320,946
December 31, 2007
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies	$ 4,715,540	$ 8,446	$ (6,983)	$ 4,717,003
Obligations of states and
political subdivisions	13,305,878	148,419	(22,733)	13,431,564
	$ 18,021,418	$ 156,865	$ (29,716)	$ 18,148,567

  The amortized cost and estimated fair market values of marketable debt securities at December 31, 2008, by contractual maturity, are shown below:

	Available for Sale		Held to Maturity
		Estimated		Estimated
	Amortized	Fair Market	Amortized	Fair Market
	Cost	Value	Cost	Value
Due in one year or less	$ 5,931,020	$ 6,213,015	$ 3,289,212	$ 3,300,166
Due after one year through five years	37,316,607	37,565,603	9,199,867	9,350,309
Due after five years through ten years	23,420,998	23,378,400	1,638,713	1,670,471
Due after ten years	720,636	726,668	--	--
	$ 67,389,261	$ 67,883,686	$ 14,127,792	$ 14,320,946

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The following table is an analysis of investment securities in an unrealized loss position for which other-than-temporary impairments have not been recognized as of December 31, 2008:

		Less than 12 Months		12 Months or Longer		Total
		Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
	Available for Sale:
	U.S. Treasury securities and obligations of U.S. government corporations and agencies	$ --	$ --	$ --	$ --	$ --	$ --
	Obligations of states and political subdivisions	17,026,076	317,608	3,145,781	131,422	20,171,857	449,030
	Total	17,026,076	317,608	3,145,781	131,422	20,171,857	449,030
	Held to Maturity:
	U.S. Treasury securities and obligations of U.S. government corporations and agencies	--	--	--	--	--	--
	Obligations of states and political subdivisions	2,161,095	22,965	484,281	3,081	2,645,376	26,045
	Total	2,161,095	22,965	484,281	3,081	2,645,376	26,045
	Overall Total	$ 19,187,171	$ 340,573	$ 3,630,062	$ 134,503	$ 22,817,233	$ 475,075
The table above represents 59 investments held by the Company, the majority of which were rated AAA.  The unrealized losses on the Company’s investments were the result of interest rate increases over the previous years. The total impairment was less than 2.1% of the fair value of the affected investments.  Based on the ratings of these investments, the Company’s ability and intent to hold these investments until a recovery of fair value and after considering the severity and duration of the impairments, the Company does not consider the impairment of these investments to be other-than-temporary at December 31, 2008.

Proceeds from sales of securities during 2008 were $7,164,450.  Gross gains of $68,296 and gross losses of $58,517 were realized on these sales.  Proceeds from redemptions of investment securities due to call provisions and regularly scheduled maturities during 2008 were $16,750,500.  Gross gains of $18,386 and gross losses of $15,269 were realized on these redemptions.  The proceeds from the sale of securities were distributed to the Company from its insurance subsidiaries and were used for general liquidity purposes.  The Company does not believe that it will have similar sales of securities with unrealized losses in the future and, thus, believes that it has the intent and ability to hold its current investments with unrealized losses until there is a recovery of the fair value.`

There were no sales of investments in debt securities available-for-sale during 2007.  Proceeds from redemptions of investment securities due to call provisions and regularly scheduled maturities during 2007 were $13,488,100.  Gross gains of $13,524 and gross losses of $12,517 were realized on these redemptions.

There were no sales of investments in debt securities available-for-sale during 2006.  Proceeds from redemptions of investment securities due to call provisions and regularly scheduled maturities during 2006 were $7,775,000.  Gross gains of $9,151 were realized on these redemptions.

4.

FAIR VALUE

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new assets or liabilities to be measured at fair value.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and, accordingly, the Company adopted this pronouncement effective January 1, 2008.

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Under SFAS No. 157, fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The following fair value hierarchy is used in selecting inputs used to determine the fair value of an asset or liability, with the highest priority given to Level 1, as these are the most transparent or reliable.   Level 1 - Quoted prices for identical instruments in active markets. Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable. The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value.  The Company performs due diligence to understand the inputs or how the data was calculated or derived.  The Company corroborates the reasonableness of external inputs in the valuation process.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation.  In periods of market dislocation, the observation of prices and inputs may be reduced for many instruments.  This condition could cause an instrument to be reclassified between levels.
Assets measured at fair value as of December 31, 2008 are available-for-sale investment securities which are summarized below:
		Fair Value Measurements at Reporting Date Using
		Quoted Prices
		In Active	Significant
		Markets for	Other	Significant
		Identical	Observable	Unobservable
		Assets	Inputs	Inputs
Description	12/31/2008	(Level 1)	(Level 2)	(Level 3)
Available-for-sale      investment securities	$ 67,883,686	$ 373,774	$ 67,509,912	$         --

5.

INSURANCE SUBSIDIARY RESTRICTIONS

As of December 31, 2008 and 2007, respectively, 87% and 96% of the Company's cash and cash equivalents and investment securities were maintained in the Company’s insurance subsidiaries.  State insurance regulations limit the types of investments an insurance company may hold in its portfolio.  These limitations specify types of eligible investments, quality of investments and the percentage a particular investment may constitute of an insurance company’s portfolio.

Dividend payments to the Company by its wholly owned insurance subsidiaries are subject to annual limitations and are restricted to the greater of 10% of statutory surplus or statutory earnings before recognizing realized investment gains of the individual insurance subsidiaries, unless prior approval from the Georgia Insurance Commissioner.  At December 31, 2008, Frandisco Property and Casualty Insurance Company and Frandisco Life Insurance Company had a statutory surplus of $28.7 million and $30.7 million, respectively.  The Company received $8.9 million in regular dividends from its subsidiaries during December 2008 based on the allowable limit.  In addition, the Company requested and was granted approval from the Georgia Insurance Commissioner to receive an additional $35.0 million in dividends from these subsidiaries during December 2008, $20.0 million of which was paid. Prior approval would be required from the Geor gia Insurance Commissioner for any dividends these subsidiaries may desire to make during 2009.

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6.

SENIOR DEBT

Effective December 15, 2006, the Company entered into a revolving credit agreement which governs the terms of a revolving credit facility (the “Credit Agreement”) with Wachovia Bank, N.A. (a Wells Fargo Company) and BMO Capital Markets Financing, Inc. and which provides for maximum borrowings of up to $50.0 million or 80% of our net finance receivables (as defined in the Credit Agreement), whichever is less.  The borrowings are on an unsecured basis.  All borrowings bear interest at .5% below the prime rate of interest or at a defined margin above a chosen LIBOR term, at the option of the Company.  A commitment fee is paid quarterly based on the unused funds available.  If unused funds are less than $30 million, the fee is .25% of the unused amount and if unused funds are greater than or equ al to $30 million, the fee rate is .50% of the unused amount.  In addition, a facility fee of $50,000 was paid to the banks when the Credit Agreement was executed.  

The Credit Agreement has a commitment termination date of December 15, 2009.  Any then- outstanding balance under the Credit Agreement would be due and payable on such date.  The banks also may terminate the agreement upon the violation of any of the financial ratio requirements or covenants contained in the Credit Agreement or if the financial condition of the Company becomes unsatisfactory to the banks, according to standards set forth in the Credit Agreement.  Such financial ratio requirements include a minimum equity requirement, an interest expense coverage ratio and a minimum debt to equity ratio, among others.

Management has begun the process of negotiating a new line of credit with the intention that such line of credit would contain additional funds availability.  It is the Company’s intention that any such new credit facility would be substantially finalized during the second quarter of 2009.

Prior to December 15, 2006, the Company had a line of credit with a bank which provided for maximum unsecured borrowings of $30.0 million or 80% of our net finance receivables (as defined in the credit agreement), whichever was less.  Interest rates were similar to those contained in the Credit Agreement.  At December 31, 2008 and 2007, the Company had balances of $22.3 million and $16.7 million, respectively, in borrowings against the credit facilities in existence at the applicable dates at interest rates of 2.75% and 6.75%, respectively.

The Company’s Senior Demand Notes are unsecured obligations which are payable on demand. The interest rate payable on any Senior Demand Note is a variable rate, compounded daily, established from time to time by the Company.

Commercial Paper is issued by the Company only to qualified investors, in amounts in excess of $50,000, with maturities of less than 270 days and at competitive interest rates that the Company believes are competitive in its market.

Additional data related to the Company's senior debt is as follows:

	Weighted
	Average	Maximum	Average	Weighted
	Interest	Amount	Amount	Average
Year Ended	Rate at end	Outstanding	Outstanding	Interest Rate
December 31	of Year	During Year	During Year	During Year
	(In thousands, except % data)
2008:
Bank	2.75%	$ 49,484	$ 22,993	4.25%
Senior Demand Notes	2.96	49,510	46,751	2.99
Commercial Paper	5.47	116,714	105,204	5.61
All Categories	4.50	187,679	174,947	4.73
2007:
Bank	6.75%	$ 24,828	$ 12,364	7.53%
Senior Demand Notes	3.13	50,453	49,268	3.27
Commercial Paper	6.43	117,948	112,926	6.66
All Categories	5.58	182,055	174,558	5.76
2006:
Bank	7.75%	$ 24,828	$ 14,988	7.59%
Senior Demand Notes	3.30	63,945	55,508	3.14
Commercial Paper	6.65	108,406	105,481	5.72
All Categories	5.90	181,474	175,977	5.07

7.

SUBORDINATED DEBT

The payment of the principal and interest on the Company’s subordinated debt is subordinate and junior in right of payment to all unsubordinated indebtedness of the Company.

Subordinated debt consists of Variable Rate Subordinated Debentures which mature four years after their date of issue.  The maturity date is automatically extended for an additional four years unless the holder or the Company redeems the debenture on its original maturity date or within any applicable grace period thereafter.  The debentures have various minimum purchase amounts with varying interest rates and interest adjustment periods for each respective minimum purchase amount, each as established. Interest rates on the debentures are adjusted at the end of each adjustment period.  The debentures may also be redeemed by the holder at the applicable interest adjustment date or within any applicable grace period thereafter without penalty.  Redemptions at any other time are at the discretion of the Company and are subject to an interest penalty. The Company may redeem the debentures for a price equal to 100% of the principal plus accrued but unpaid interest upon 30 days’ notice to the holder.

Interest rate information on the Company’s subordinated debt at December 31 is as follows:

Weighted Average Rate at			Weighted Average Rate
End of Year			During Year
2008	2007	2006	2008	2007	2006
5.94%	6.71%	6.16%	6.28%	6.49%	5.43%

Maturity information on the Company's subordinated debt at December 31, 2008 is as follows:

	Amount Maturing
	Based on Maturity	Based on Interest
	Date	Adjustment Period
2009	$ 6,555,690	$ 57,683,777
2010	20,403,033	15,540,559
2011	30,611,726	10,827,626
2012	29,034,560	2,553,047
	$ 86,605,009	$ 86,605,009

8.

COMMITMENTS AND CONTINGENCIES

The Company's operations are carried on in locations which are occupied under operating lease agreements.  These lease agreements usually provide for a lease term of five years with the Company holding a renewal option for an additional five years.  There are also operating leases for computer equipment the Company uses in its operations.  Operating leases for equipment have terms of three years.  Total operating lease expense was $4,494,612, $4,900,175 and $4,463,315 for the years ended December 31, 2008, 2007 and 2006, respectively.  The Company’s minimum aggregate lease commitments at December 31, 2008 are shown in the table below.  

Year	Operating Equipment Leases	Operating Occupancy Leases	Total Operating Leases
2009	$ 83,346	$ 4,220,144	$ 4,303,490
2010	--	3,455,639	3,455,639
2011	--	2,448,992	2,448,992
2012	--	1,597,455	1,597,455
2013	--	663,865	663,865
2014 and beyond	--	14,747	14,747
Total	$ 83,346	$ 12,400,842	$ 12,484,188

As of December 31, 2008 and 2007, the Company had no capital lease obligations.  Prior to September 2007 the Company utilized capital leases for certain equipment used in its operations.  During September 2007, equipment previously obtained through capital leases was sold to an equipment vendor, with the vendor buying out the leases and assuming the related lease obligations.

The Company is involved in various claims and lawsuits incidental to its business from time to time.  In the opinion of Management, the ultimate resolution of any such known claims and lawsuits will not have a material effect on the Company's financial position, liquidity or results of operations.

9.

EMPLOYEE BENEFIT PLANS

Prior to June 1, 2007, the Company maintained a profit sharing and 401(k) plan, which was qualified under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986 (the “Code”), as amended, to cover employees of the Company.  Effective June 1, 2007, the Company amended the plan to include a Company 401(k) match feature.  The 401(k) match feature replaces the profit sharing portion of the plan going forward.

Any employee who has attained the age of 18, worked 1,000 hours and twelve consecutive months for the Company is eligible to participate in the profit sharing portion of the plan; automatic enrollment occurred on the January 1^st or July 1^st  (up until the discontinuance of the plan in June of 2007) after meeting the requirements.   The Company’s contribution to the profit sharing plan was determined at the discretion of the executive officers of the Company and approved by the Board of Directors, based on the profits of 1^st Franklin Financial Corporation.   An employee became 100% vested in his/her profit sharing account after he/she has completed at least five years of service, with 1,000 hours completed in each year.  Total contributions by the Company w ere $-0-, $635,000, and $992,018 for the years 2008, 2007 and 2006 respectively.  The contribution was lower in 2007 due to the discontinuation of the profit sharing plan and the addition of the aforementioned Company 401(k) match feature which was added in June.  

Prior to June of 2007, any employee who had attained the age of 18 was eligible to participate in the 401(k) portion of the plan upon hire; voluntary enrollment could take place any time during the first month of each quarter.  401(k) funds are deferred on a pre-tax basis.  An employee was immediately 100% vested in these funds.  Beginning in June 2007, employees who were 18 years of age or older were eligible to participate in the 401(k) plan on the first day of the month following 30 days of continuous employment and the Company began matching up to 4.50qw% of an employee’s deferred contribution, up to 6.00% of their total compensation.  During 2008 and 2007, the Company contributed $1,103,483 and $398,750 in matching funds for employee 401(k) deferred accounts, respectively.

The Company also maintains a non-qualified deferred compensation plan for employees who receive compensation in excess of the amount provided in Section 401(a)(17) of the Code, as said amount may be adjusted from time to time in accordance with the Code.

10.

RELATED PARTY TRANSACTIONS

The Company leases a portion of its properties (see Note 8) for an aggregate of $156,000 per year from certain officers or stockholders. In Management's opinion, these leases are at rates which approximate those obtainable from independent third parties.

During 1999, a loan was extended to a real estate development partnership of which one of the Company’s beneficial owners (David W. Cheek) is a partner.  David Cheek (son of Ben F. Cheek, III) owns 10.59% of the Company’s voting stock. The loan was renewed on November 27, 2006.  The balance on this commercial loan (including principal and accrued interest) was $935,614 at December 31, 2008.  The maximum amount outstanding during the year was $1,677,762.  The loan is a variable-rate loan with the interest based on the prime rate plus 1%. The interest rate adjusts whenever the prime rate changes.

Effective September 23, 1995, the Company entered into a Split-Dollar Life Insurance Agreement with the Trustee of an executive officer’s irrevocable life insurance trust.  The life insurance policy insures one of the Company’s executive officers.  As a result of certain changes in tax regulations relating to split-dollar life insurance policies, the agreement was amended effectively making the premium payments a loan to the Trust.  The interest on the loan is a variable rate adjusting monthly based on the federal mid-term Applicable Federal Rate.  A payment of $6,888 for interest accrued during 2008 was applied to the loan on December 23, 2008.  No principal payments on this loan were made in 2008.  The balance on this loan at December 31, 2008 was $231,318.  This was the maxim um loan amount outstanding during the year.

11.

INCOME TAXES

The Company has elected to be treated as an S corporation for income tax reporting purposes.  The taxable income or loss of an S corporation is included in the individual tax returns of the shareholders of the company.  Accordingly, deferred income tax assets and liabilities have been eliminated and no provisions for current and deferred income taxes were made by the Company other than amounts related to prior years when the Company was a taxable entity and for amounts attributable to state income taxes for the state of Louisiana, which does not recognize S corporation status for income tax reporting purposes.  Deferred income tax assets and liabilities will continue to be recognized and provisions for current and deferred income taxes will be made by the Company’s subsidiaries.

The provision for income taxes for the years ended December 31, 2008, 2007 and 2006 is made up of the following components:

	2008	2007	2006
Current – Federal	$ 2,928,904	$ 3,268,108	$ 3,042,559
Current – State	11,713	28,965	21,504
Total Current	2,940,617	3,297,073	3,064,063
Deferred – Federal	155,830	251,823	286,851
Total Provision	$ 3,096,447	$ 3,548,896	$ 3,350,914

Temporary differences create deferred federal tax assets and liabilities, which are detailed below for December 31, 2008 and 2007.  These amounts are included in accounts payable and accrued expenses in the accompanying consolidated statements of financial position.

	Deferred Tax Assets (Liabilities)
	2008	2007
Insurance Commission	$ (4,173,874)	$ (3,991,962)
Unearned Premium Reserves	1,545,313	1,501,323
Unrealized Gain on
Marketable Debt Securities	(61,323)	(74,930)
Other	(301,693)	(283,785)
	$ (2,991,577)	$ (2,849,354)

The Company's effective tax rate for the years ended December 31, 2008, 2007 and 2006 is analyzed as follows.  Rates were higher during the year ended December 31, 2006 due to losses in the S corporation being passed to the shareholders for tax reporting, whereas income earned by the insurance subsidiaries was taxed at the corporate level.  Shareholders were able to use S corporation losses to offset other income they may have had to the extent of their basis in their S corporation stock.

	2008	2007	2006
Statutory Federal income tax rate	34.0%	34.0%	34.0%
State income tax, net of Federal
tax effect	.1	.1	.1
Net tax effect of IRS regulations
on life insurance subsidiary	(3.5)	(2.9)	(4.3)
Tax effect of S corporation status	(2.7)	(5.2)	4.8
Other Items	(5.4)	(3.5)	(4.2)
Effective Tax Rate	22.5%	22.5%	30.4%

12.

SEGMENT FINANCIAL INFORMATION:

The Company discloses segment information in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which the Company adopted in 1998.  SFAS No. 131 requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance.

Effective January 1, 2006, the Company realigned its reportable business segments in Georgia, dividing the previous two divisions into three divisions.  The Company now has six reportable segments: Division I through Division V and Division VII.  Each segment is comprised of a number of branch offices that are aggregated based on vice president responsibility and geographical location.  Division I is comprised of offices located in South Carolina.  Division II is comprised of offices in North Georgia, Division III encompasses Central and South Georgia offices, and Division VII is comprised of offices in West Georgia.  Division IV represents our Alabama and Tennessee offices, and our offices in Louisiana and Mississippi encompass Division V.  Division VI is reserved for future use.

Accounting policies of the segments are the same as those described in the summary of significant accounting policies.  Performance is measured based on objectives set at the beginning of each year and include various factors such as segment profit, growth in earning assets and delinquency and loan loss management.  All segment revenues result from transactions with third parties.  The Company does not allocate income taxes or corporate headquarter expenses to the segments.

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Below is a performance recap of each of the Company's reportable segments for the year ended December 31, 2008 followed by a reconciliation to consolidated Company data.  

Year 2008	Division I	Division II	Division III	Division IV	Division V	Division VII	Total Segments
Revenues:	( In Millions)
Finance Charges Earned	$  13.4	$  13.4	$  18.0	$ 18.4	$  16.2	$   14.8	$   94.2
Insurance Income	3.2	5.2	7.1	4.1	4.2	5.7	29.5
Other	.1	.9	1.2	.8	1.1	1.0	5.1
	16.7	19.5	26.3	23.3	21.5	21.5	128.8
Expenses:
Interest Cost	1.9	2.3	3.0	2.8	2.1	2.5	14.6
Provision for Loan Losses	3.6	2.5	4.7	4.6	3.7	3.6	22.7
Depreciation	.3	.3	.3	.4	.3	.3	1.9
Other	8.7	7.6	10.2	9.3	9.4	7.6	52.8
	14.5	12.7	18.2	17.1	15.6	14.0	92.0
Segment Profit	$   2.2	$   6.8	$   8.1	$  6.2	$   6.0	$    7.5	$  36.8
Segment Assets:
Net Receivables	$ 40.0	$ 48.8	$ 64.4	$ 64.3	$ 45.6	$ 54.1	$317.2
Cash	.3	.4	.7	.5	.5	.5	2.9
Net Fixed Assets	1.2	.9	1.1	1.6	1.1	.7	6.6
Other Assets	.0	.1	.0	.1	.0	.0	.2
Total Segment Assets	$ 41.5	$ 50.2	$ 66.2	$ 66.5	$ 47.2	$ 55.3	$326.9
RECONCILIATION:							2008
Revenues:							(In Millions)
Total revenues from  reportable segments							$ 128.8
Corporate finance charges earned not allocated to segments							.3
Reclass of investment income net against interest cost							.-
Reclass of insurance expense against insurance income							3.8
Timing difference of insurance income allocation to segments							5.5
Other revenues not allocated to segments							.2
Consolidated Revenues							$138.6
Net Income:
Total profit or loss for reportable segments							$  36.8
Corporate earnings not allocated							9.8
Corporate expenses not allocated							(32.8)
Income taxes not allocated							(3.1)
Consolidated Net Income							$  10.7
Assets:
Total assets for reportable segments							$326.9
Loans held at corporate home office level							2.8
Unearned insurance at corporate level							(11.4)
Allowance for loan losses at corporate level							(23.0)
Cash and cash equivalents held at  corporate level							2.6
Investment securities at corporate level							82.0
Fixed assets at corporate level							2.7
Other assets at corporate level							6.8
Consolidated Assets							$389.4

-#-

Below is a performance recap of each of the Company's reportable segments for the year ended December 31, 2007 followed by a reconciliation to consolidated Company data.  

Year 2007	Division I	Division II	Division III	Division IV	Division V	Division VII	Total Segments
Revenues:	( In Millions)
Finance Charges Earned	$  12.1	$  12.0	$  17.5	$ 16.7	$  14.6	$   13.9	$   86.8
Insurance Income	3.0	4.8	7.6	4.3	4.1	5.7	29.5
Other	.1	.9	1.1	.7	1.1	1.0	4.9
	15.2	17.7	26.2	21.7	19.8	20.6	121.2
Expenses:
Interest Cost	2.0	2.3	3.4	2.9	2.2	2.7	15.5
Provision for Loan Losses	3.5	1.9	4.0	3.8	3.2	3.1	19.5
Depreciation	.3	.2	.3	.3	.3	.2	1.6
Other	7.7	7.2	9.8	7.5	8.5	7.3	48.0
	13.5	11.6	17.5	14.5	14.2	13.3	84.6
Segment Profit	$   1.7	$   6.1	$   8.7	$  7.2	$   5.6	$    7.3	$  36.6
Segment Assets:
Net Receivables	$ 38.3	$ 45.9	$ 64.0	$ 59.6	$ 43.8	$ 52.4	$304.0
Cash	.3	.4	.7	.6	.5	.5	3.0
Net Fixed Assets	1.2	.8	1.1	1.3	1.0	.8	6.2
Other Assets	.0	.0	.1	.0	.1	.0	.2
Total Segment Assets	$ 39.8	$ 47.1	$ 65.9	$ 61.5	$ 45.4	$ 53.7	$313.4
RECONCILIATION:							2007
Revenues:							(In Millions)
Total revenues from  reportable segments							$ 121.2
Corporate finance charges earned not allocated to segments							.3
Reclass of investment income net against interest cost							.0
Reclass of insurance expense against insurance income							4.3
Timing difference of insurance income allocation to segments							4.3
Other revenues not allocated to segments							.2
Consolidated Revenues							$130.3
Net Income:
Total profit or loss for reportable segments							$  36.6
Corporate earnings not allocated							9.1
Corporate expenses not allocated							(30.0)
Income taxes not allocated							(3.5)
Consolidated Net Income							$  12.2
Assets:
Total assets for reportable segments							$313.4
Loans held at corporate home office level							3.6
Unearned insurance at corporate level							(10.9)
Allowance for loan losses at corporate level							(20.0)
Cash and cash equivalents held at  corporate level							29.0
Investment securities at corporate level							78.1
Fixed assets at corporate level							2.8
Other assets at corporate level							6.5
Consolidated Assets							$402.5

-#-

Below is a performance recap of each of the Company's reportable segments for the year ended December 31, 2006 followed by a reconciliation to consolidated Company data.

Year 2006	Division I	Division II	Division III	Division IV	Division V	Division VII	Total Segments
Revenues:	( In Millions)
Finance Charges Earned	$  11.6	$ 10.3	$  15.9	$ 14.6	$ 12.7	$   12.5	$   77.6
Insurance Income	2.8	4.3	7.2	4.0	3.6	5.4	27.3
Other	.1	.3	.4	.4	.3	.4	1.9
	14.5	14.9	23.5	19.0	16.6	18.3	106.8
Expenses:
Interest Cost	1.6	1.7	2.7	2.2	1.7	2.0	11.9
Provision for Loan Losses	3.6	1.7	3.9	3.2	2.6	2.9	17.9
Depreciation	.3	.2	.2	.2	.3	.2	1.4
Other	7.2	6.9	9.4	6.7	7.7	6.9	44.8
	12.7	10.5	16.2	12.3	12.3	12.0	76.0
Segment Profit	$   1.8	$   4.4	$   7.3	$  6.7	$   4.3	$    6.3	$  30.8
Segment Assets:
Net Receivables	$ 35.0	$ 38.6	$ 60.7	$ 53.6	$ 39.5	$  47.6	$275.0
Cash	.5	.5	.8	.7	.7	.6	3.8
Net Fixed Assets	.8	.7	.7	.8	.7	.7	4.4
Other Assets	.1	.1	.1	.0	.1	.0	.4
Total Segment Assets	$ 36.4	$  39.9	$  62.3	$ 55.1	$ 41.0	$ 48.9	$283.6
RECONCILIATION:							2006
Revenues:							(In Millions)
Total revenues from  reportable segments							$106.8
Corporate finance charges earned not allocated to segments							.2
Reclass of investment income net against interest cost							(.0)
Reclass of insurance expense against insurance income							3.7
Timing difference of insurance income allocation to segments							4.0
Other revenues not allocated to segments							.3
Consolidated Revenues							$115.0
Net Income:
Total profit or loss for reportable segments							$  30.8
Corporate earnings not allocated							8.2
Corporate expenses not allocated							(28.0)
Income taxes not allocated							(3.3)
Consolidated Net Income							$    7.7
Assets:
Total assets for reportable segments							$283.7
Loans held at corporate home office level							2.6
Unearned insurance at corporate level							(9.7)
Allowance for loan losses at corporate level							(18.1)
Cash and cash equivalents held at  corporate level							22.1
Investment securities at corporate level							73.1
Fixed assets at corporate level							2.6
Other assets at corporate level							6.3
Consolidated Assets							$362.6

-#-

DIRECTORS AND EXECUTIVE OFFICERS

Directors

Principal Occupation,

 Has Served as a

      Name

Title and Company

Director Since

Ben F. Cheek, III

Chairman of Board and Chief Executive Officer,

1967

1^st Franklin Financial Corporation

Ben F. Cheek, IV

Vice Chairman of Board,

2001

1^st Franklin Financial Corporation

A. Roger Guimond

Executive Vice President and

2004

Chief Financial Officer,

1^st Franklin Financial Corporation

John G. Sample, Jr.

Senior Vice President and Chief Financial Officer,

2004

Atlantic American Corporation

C. Dean Scarborough

Real Estate Agent

2004

Robert E. Thompson

Retired Doctor

1970

Keith D. Watson

Vice President and Corporate Secretary,

2004

Bowen & Watson, Inc.

Executive Officers

Served in this

     Name

Position with Company

Position Since

Ben F. Cheek, III

Chairman of Board and CEO

1989

Ben F. Cheek, IV

Vice Chairman of Board

2001

Virginia C. Herring

President

2001

A. Roger Guimond

Executive Vice President and

   Chief Financial Officer

1991

J. Michael Culpepper

Executive Vice President and

2006

   Chief Operating Officer

C. Michael Haynie

Executive Vice President -

2006

   Human Resources

Karen S. Lovern

Executive Vice President -

2006

   Strategic and Organization Development

Charles E. Vercelli, Jr.

Executive Vice President -

2008

   General Counsel

Lynn E. Cox

Vice President / Secretary & Treasurer

1989

CORPORATE INFORMATION

Corporate Offices   

Legal Counsel   

Independent Registered Public

P.O. Box 880

Jones Day

Accounting Firm

135 East Tugalo Street

Atlanta, Georgia

Deloitte & Touche LLP

Toccoa, Georgia 30577

Atlanta, Georgia

(706) 886-7571

Requests for Additional Information

Informational inquiries, including requests for a copy of the Company’s most recent annual report on Form 10-K, and any subsequent quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission, should be addressed to the Company's Secretary at the corporate offices listed above.

-#-

BRANCH OPERATIONS
Division I - South Carolina
		Virginia K. Palmer	----------		Vice President
		Regional Operations Directors
		Glenn M. Drawdy			Brian L. McSwain
		Michael J. Lee			Roy M. Metzger
		Judy E. Mayben			Larry D. Mixson
Division II - Northeast Georgia
		Ronald F. Morrow	----------			Vice President
		Regional Operations Directors
		A. Keith Chavis				Janee G. Huff
		Shelia H. Garrett				John R. Massey
		Harriet Healey				Sharon S. Langford
Division III – Northwest / Central Georgia
		Dianne H. Moore	----------			Vice President
		Regional Operations Directors
		Bertrand P. Brown				Jeffrey C. Lee
		William J. Daniel				Thomas C. Lennon
		Judy A. Landon				Marcus C. Thomas
Division IV - South Georgia
		Michael J. Whitaker	----------		Vice President
		Regional Operations Directors
		Joseph R. Cherry			Johnny M. Olive
		Jerry H. Hughes			Hilda L. Phillips
		Janice B. Hyde			Henrietta R. Reathford
Division V – Alabama and Tennessee
		James P. Smith, III	----------		Vice President
		Regional Operations Directors
		Sonya L. Acosta			T. Loy Davis
		Bryan W. Cook			John B. Gray
		Charles R. Childress			Marty B. Miskelly
		Jeremy R. Cranfield
Division VII - Louisiana and Mississippi
		Ronald E. Byerly	----------			Vice President
		Regional Operations Directors
		Jack L. Hobgood				Michelle M. Rentz
		James A. Mahaffey				Diana L. Vaughn
ADMINISTRATION
Lynn E. Cox	Vice President – Investment Center			Pamela S. Rickman			Vice President  - Compliance / Audit
Cindy Mullin	Vice President –    Information Technology			R. Darryl Parker			Vice President -    Employee Development
Anita S. Looney	Vice President –  Branch Administration

___________________

2008 BEN F. CHEEK, JR. "OFFICE OF THE YEAR"

*********************

** PICTURE OF EMPLOYEES **

*********************

This award is presented annually in recognition of the office that represents the highest overall performance within the Company.  Congratulations to the entire New Iberia, Louisiana staff for this significant achievement.  The Friendly Franklin Folks salute you!

-#-

                                   INSIDE BACK COVER PAGE OF ANNUAL REPORT

(Graphic showing state maps of Alabama, Georgia, Louisiana, Mississippi and South Carolina which is regional operating territory of Company and listing of branch offices)

1^st FRANKLIN FINANCIAL CORPORATION BRANCH OFFICES

ALABAMA
Adamsville	Bessemer	Enterprise	Huntsville (2)	Opp	Scottsboro
Albertville	Center Point	Fayette	Jasper	Oxford	Selma
Alexander City	Clanton	Florence	Moody	Ozark	Sylacauga
Andalusia	Cullman	Fort Payne	Moulton	Pelham	Troy
Arab	Decatur	Gadsden	Muscle Shoals	Prattville	Tuscaloosa
Athens	Dothan	Hamilton	Opelika	Russellville (2)	Wetumpka

GEORGIA
Adel	Canton	Dahlonega	Glennville	Madison	Statesboro
Albany (2)	Carrollton	Dallas	Gray	Manchester	Stockbridge
Alma	Cartersville	Dalton	Greensboro	McDonough	Swainsboro
Americus	Cedartown	Dawson	Griffin (2)	Milledgeville	Sylvania
Athens (2)	Chatsworth	Douglas (2)	Hartwell	Monroe	Sylvester
Bainbridge	Clarkesville	Douglasville	Hawkinsville	Montezuma	Thomaston
Barnesville	Claxton	East Ellijay	Hazlehurst	Monticello	Thomson
Baxley	Clayton	Eastman	Helena	Moultrie	Tifton
Blairsville	Cleveland	Eatonton	Hinesville (2)	Nashville	Toccoa
Blakely	Cochran	Elberton	Hogansville	Newnan	Valdosta (2)
Blue Ridge	Colquitt	Fitzgerald	Jackson	Perry	Vidalia
Bremen	Commerce	Flowery Branch	Jasper	Pooler	Villa Rica
Brunswick	Conyers	Forsyth	Jefferson	Richmond Hill	Warner Robins
Buford	Cordele	Fort Valley	Jesup	Rome	Washington
Butler	Cornelia	Gainesville	LaGrange	Royston	Waycross
Cairo	Covington	Garden City	Lavonia	Sandersville	Waynesboro
Calhoun	Cumming	Georgetown	Lawrenceville	Savannah	Winder

LOUISIANA
Alexandria	DeRidder	Houma	Marksville	New Iberia	Prairieville
Bossier City	Eunice	Jena	Minden	Opelousas	Ruston
Crowley	Franklin	Lafayette	Morgan City	Pineville	Slidell
Denham Springs	Hammond	Leesville	Natchitoches

DeRidder

MISSISSIPPI
Batesville	Columbus	Hattiesburg	Jackson	New Albany	Ripley
Bay St. Louis	Corinth	Hazlehurst	Kosciusko	Newton	Senatobia
Booneville	Forest	Hernando	Magee	Oxford	Starkville
Brookhaven	Grenada	Houston	McComb	Pearl	Tupelo
Carthage	Gulfport	Iuka	Meridian	Picayune	Winona
Columbia

Columbia

SOUTH CAROLINA
Aiken	Cheraw	Florence	Lexington	North Charleston	Summerville
Anderson	Chester	Gaffney	Lugoff	North Greenville	Sumter
Barnwell	Clemson	Greenville	Manning	Orangeburg	Union
Batesburg-      Leesville	Columbia	Greenwood	Marion	Rock Hill	Walterboro
Boling Springs	Conway	Greer	Moncks     Corner	Seneca	Winnsboro
Cayce	Dillon	Lancaster	Newberry	Simpsonville	York
Charleston	Easley	Laurens	North Augusta	Spartanburg

TENNESSEE
Athens	Elizabethton	Johnson City	Kingsport	Lenior City	Sparta
Bristol

1^st FRANKLIN FINANCIAL CORPORATION

MISSION STATEMENT:

 "1^st Franklin Financial is a major provider of financial and consumer services to individuals and families.  

Our business will be managed according to best practices that will allow us to maintain a healthy financial position.”

CORE VALUES:

Ø

Integrity Without Compromise

Ø

Open Honest Communication

Ø

Respect all Customers and Employees

Ø

Teamwork and Collaboration

Ø

Personal Accountability

Ø

Run It Like You Own It

-#-

EX-15

Exhibit 15

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To:

The Board of Directors of 1^st Franklin Financial Corporation

We have audited the consolidated financial statements of 1^st Franklin Financial Corporation and subsidiaries (the “Company’) as of December 31, 2008 and 2007, and for each of the three years in the period ended December 31, 2008, and have issued our report thereon dated March 27, 2009; such financial statements and report are included in the Company’s 2008 Annual Report to Investors and are incorporated herein by reference.  Our audits also included the financial statement schedule of the Company listed in Item 15.  The financial statement schedule is the responsibility of the Company’s management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth the rein.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia

March 27, 2009

SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
DECEMBER 31, 2008 AND 2007
ASSETS
	2008	2007

CASH AND CASH EQUIVALENTS:
Cash and Due From Banks		$ 396,752	$ 3,679,047
Short-term Investments		--	6,078
		396,752	3,685,125
LOANS:
Direct Cash Loans		324.996,394	303,678,240
Real Estate Loans		24,175,593	25,052,160
Sales Finance Contracts		27,586,508	31,747,131
		376,758,495	360,477.531
Less:	Unearned Finance Charges	44,032,487	40,720,500
	Unearned Insurance Commissions	12,465,624	11,831,811
	Allowance for Loan Losses	23,010,085	20,035,085
		297,250,299	287,890,135
INVESTMENTS IN SUBSIDIARIES		75,844,337	95,188,316
MARKETABLE DEBT SECURITIES:
Available for Sale, at fair market value		373,774	894,381
OTHER ASSETS:
Land, Buildings, Equipment and Leasehold Improvements,
less accumulated depreciation and amortization
of $13,653,028 and $12,383,615 in 2008          and 2007, respectively		9,241,725	8,926,207
Miscellaneous		3,201,592	2,788,231
		12,443,317	11,714,438
TOTAL ASSETS		$ 386,308,479	$ 399,372,395

2

SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
DECEMBER 31, 2008 AND 2007
LIABILITIES AND STOCKHOLDERS' EQUITY
	2008	2007

SENIOR DEBT:
Notes Payable to Banks	$  22,267,681	$  16,684,681
Senior Demand Notes, including accrued interest	41,345,213	48,610,737
Commercial Paper	106,062,799	117,077,531
	169,675,693	182,372,949
ACCOUNTS PAYABLE AND ACCRUED EXPENSES	13,980,948	15,399,744
SUBORDINATED DEBT	86,605,009	91,965,714
Total Liabilities	270,261,650	289,738,407
STOCKHOLDERS' EQUITY:
Preferred Stock; $100 par value
6,000 shares authorized; no shares issued or outstanding	--	--
Common Stock:
Voting Shares; $100 par value;
2,000 shares authorized; 1,700 shares issued and outstanding as of December 31, 2008 and 2007	170,000	170,000
Non-Voting Shares; no par value;
198,000 shares authorized; 168,300 shares issued and
outstanding as of December 31, 2008 and 2007	--	--
Accumulated Other Comprehensive Income	243,458	764,065
Retained Earnings	115,633,371	108,699,923
Total Stockholders' Equity	116,046,829	109,633,988
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 386,308,479	$ 399,372,395

3

SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
	2008	2007	2006
INTEREST INCOME:
Finance Charges	$ 94,434,623	$ 87,164,381	$ 77,914,247
Investment Income	26,302	21,189	22,131
	94,460,925	87,185,570	77,936,378
INTEREST EXPENSE:
Senior Debt	8,333,678	10,158,113	8,875,312
Subordinated Debt	6,393,999	5,587,502	3,118,314
	14,727,677	15,745,615	11,993,626
NET INTEREST INCOME	79,733,248	71,439,955	65,942,752
PROVISION FOR LOAN LOSSES	25,725,394	21,433,742	19,108,562
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	54,007,854	50,006,213	46,834,190
NET INSURANCE INCOME	16,823,210	16,298,194	14,821,492
OTHER REVENUE	5,301,054	5,069,095	2,147,104
OPERATING EXPENSES:
Personnel Expense	46,830,271	42,798,905	40,378,370
Occupancy Expense	10,653,752	9,778,649	8,979,037
Other Expense	17,545,462	16,375,184	16,000,405
	75,029,485	68,952,738	65,357,812
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF SUBSIDIARIES	1,102,633	2,420,764	(1,555,026)
PROVISION FOR INCOME TAXES	11,713	28,965	21,504
EQUITY IN EARNINGS OF SUBSIDIARIES, Net of Tax	9,573,856	9,812,964	9,248,292
NET INCOME	10,664,776	12,204,763	7,671,762
RETAINED EARNINGS, Beginning of Period	108,699,923	97,950,753	90,746,492
Distributions on Common Stock	3,731,328	1,455,593	467,501
RETAINED EARNINGS, End of Period	$ 115,633,371	$ 108,699,923	$ 97,950,753

4

SCHEDULE I
1st FRANKLIN FINANCIAL CORPORATION
(Parent Company Only)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
	2008	2007	2006

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income	$ 10,664,776	$ 12,204,763	$ 7,671,762
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for Loan Losses	25,725,394	21,433,742	19,108,562
Depreciation and Amortization	2,447,007	2,076,784	1,888,433
Equity in undistributed earnings of subsidiaries	19,343,979	(9,795,963)	(9,234,792)
Gain on sale of marketable securities and
equipment and premium amortization on securities	(10,185)	(37)	(82,129)
(Increase) Decrease in Miscellaneous Assets	(413,361)	488,620	(444,563)
(Decrease) Increase in Other Liabilities	(1,418,796)	2,253,485	1,198,376
Net Cash Provided	56,338,814	28,661,394	20,105,649
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated or purchased	(236,634,867)	(250,121,741)	(231,849,878)
Loan payments	201,549,309	200,622,963	186,658,690
Purchases of securities, available for sale	--	--	--
Sales of securities, available for sale	--	--	--
Redemptions of securities, available for sale	--	--	--
Principal payments on securities, available for sale	--	--	--
Capital expenditures	(2,777,574)	(4,383,965)	(2,089,399)
Proceeds from sale of equipment	25,234	443,450	438,439
Net Cash Used	(37,837,898)	(53,439,293)	(46,842,148)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Notes Payable to
Banks and Senior Demand Notes	(1,682,524)	(8,412,339)	569,186
Commercial Paper issued	35,766,727	33,538,927	44,177,066
Commercial Paper redeemed	(46,781,459)	(24,256,208)	(43,956,538)
Subordinated Debt issued	21,619,938	36,790,393	35,526,664
Subordinated Debt redeemed	(26,980,643)	(12,014,336)	(7,238,642)
Dividends / Distributions Paid	(3,731,328)	(1,455,593)	(467,501)
Net Cash (Used) Provided	(21,789,289)	24,190,844	28,610,235
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS	(3,288,373)	(587,055)	1,873,736
CASH AND CASH EQUIVALENTS, beginning	3,685,125	4,272,180	2,398,444
CASH AND CASH EQUIVALENTS, ending	$ 396,752	$ 3,685,125	$ 4,272,180

Cash paid during the year for:	Interest	$ 14,830,353	$ 15,667,174	$ 11,694,753
	Income Taxes	10,700	41,910	31,785

5

EX-21

Exhibit 21

SUBSIDIARIES OF REGISTRANT

Franklin Securities, Inc., a Georgia corporation.

Frandisco Property and Casualty Insurance Company, a Georgia corporation.

Frandisco Life Insurance Company, a Georgia corporation.

T&T, Inc., a Georgia corporation.

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in Registration Statement Nos. 333-150223 and 333-148331 on Form S-1 of our reports dated March 27, 2009, relating to the consolidated financial statements and financial statement schedule of 1^st Franklin Financial Corporation, appearing in and incorporated by reference in this Annual Report on Form 10-K of 1^st Franklin Financial Corporation for the year ended December 31, 2008.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

March 27, 2009

EX-31

Exhibit 31.1

RULE 13a-14(a)/15d-14(a)

CERTIFICATIONS

I,  Ben F. Cheek, III, certify that:

1.

I have reviewed this annual report on Form 10-K of 1^st Franklin Financial Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))  for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of   internal control over financial reporting, to the registrant's auditors and the audit committee of   registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:

March 27, 2009

/s/ Ben F. Cheek, III

Ben F. Cheek, III, Chairman and

Chief Executive Officer

EX-31

Exhibit 31.1

RULE 13a-14(a)/15d-14(a)

CERTIFICATIONS

I,  A. Roger Guimond, certify that:

1.

I have reviewed this annual report on Form 10-K of 1^st Franklin Financial Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))  for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of   internal control over financial reporting, to the registrant's auditors and the audit committee of   registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:

March  27, 2009

/s/ A. Roger Guimond

A. Roger Guimond

Executive Vice President and

Chief Financial Officer

EX-32

Exhibit 32.1

1^st FRANKLIN FINANCIAL CORPORATION

213 EAST TUGALO STREET

P.O. BOX 880

TOCCOA, GEORGIA  30577

TELEPHONE:  (706) 886-7571

March 27, 2009

Re:

Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002

Ladies and Gentlemen:

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the annual report of 1^st Franklin Financial Corporation (the "Company") for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on Form 10-K on the date hereof (the "Report"), the undersigned officer of the Company certifies, that, to such officer’s knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d)

of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material

respects, the financial condition and results of operations of the Company

as of the dates and for the periods expressed in the Report.

/s/ Ben F. Cheek, III

Name:  Ben F. Cheek, III

Title:  Chairman and Chief Executive Officer

EX-32

Exhibit 32.2

1^st FRANKLIN FINANCIAL CORPORATION

213 EAST TUGALO STREET

P.O. BOX 880

TOCCOA, GEORGIA  30577

TELEPHONE:  (706) 886-7571

March 27, 2009

Re:

Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002

Ladies and Gentlemen:

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the annual report of 1^st Franklin Financial Corporation (the "Company") for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on Form 10-K on the date hereof (the "Report"), the undersigned officer of the Company certifies, that, to such officer’s knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d)

of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material

respects, the financial condition and results of operations of the Company

as of the dates and for the periods expressed in the Report.

/s/ A. Roger Guimond

Name:  A. Roger Guimond

Title:  Executive Vice President and

           Chief Financial Officer