UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

      __X__QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
                                                           OR
      ____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                TO

      Commission File Number 0-26016

                            PALMETTO BANCSHARES, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

              South Carolina                             74-2235055
       ---------------------------------            -----------------------
       (State or other jurisdiction                 (I.R.S. Employer
       of incorporation or organization)            Identification No.)

                               301 Hillcrest Drive
                             Laurens, South Carolina
                                      29360
                --------------------------------------------
         (Address of principal executive offices)
            (Zip Code)

          (864) 984-4551
              --------------------------------------------------
          ( Registrant's telephone number, including area code)


            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
                                     ---     ---

            Indicate the number of shares outstanding of each of the issuer's
            classes of common stock, as of the latest practicable date.


             Class                              Outstanding at July 31, 1997
       -----------------------------            -------------------------------
           Common stock, $5.00 par value                      3,059,952




<PAGE>



                            PALMETTO BANCSHARES, INC.

                          Quarterly Report on Form 10-Q
                         For Quarter Ended June 30, 1997



                                INDEX                  Page No.
                                                        
PART I - FINANCIAL INFORMATION                          

Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996                                          1

Consolidated Income Statements for the Three Months
Ended June 30, 1997 and 1996                               2

Consolidated Income Statements for the Six Months
Ended June 30, 1997 and 1996                               3

Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1997 and 1996                4

Notes to Consolidated Interim  Financial Statements        5

Management's Discussion and Analysis of
Financial Condition and Results of Operations            6 - 14
                                                         
PART II - OTHER INFORMATION                             15 - 16
SIGNATURES                                                   17





<PAGE>




                    PALMETTO BANCSHARES, INC. AND SUBSIDIARY
                   Consolidated Balance Sheets
                   (Dollars in Thousands, except per share data)
     


<TABLE>
<CAPTION>

                                                                                                       June 30,        December 31,
                                                                                                         1997              1996
                                                                                               -------------------------------------
Assets                                                                                                       (unaudited)
<S>                                                                                                 <C>                 <C>
Cash and due from banks                                                                              $27,523             $28,373    
Federal funds sold                                                                                     1,447               1,951
Federal Home Loan Bank stock, at cost                                                                  1,452                 --
Investment securities held to maturity (market values of $80,071
     and $66,770 in 1997 and 1996, respectively)                                                      79,632              66,207
Investment securities available for sale (amortized cost of $24,594
     and $15,970, in 1997 and 1996, respectively)                                                     24,805              16,240
Loans held for sale                                                                                        --              4,075
Loans                                                                                                346,076             332,986
     Less allowance for loan losses                                                                   (4,903)             (4,729)
                                                                                             -------------------------------------
                 Loans, net                                                                          341,173             328,257

Premises and equipment, net                                                                           12,512              12,323
Accrued interest                                                                                       3,907               3,437
Other assets                                                                                           8,899               7,514
                                                                                            -------------------------------------
                                 Total assets                                                       $501,350            $468,377
                                                                                             =====================================

Liabilities and Shareholders' Equity

Liabilities:
Deposits:
     Non-interest-bearing                                                                             72,181              71,349
     Interest-bearing                                                                                367,276             341,037
                                                                                              -------------------------------------
                 Total deposits                                                                      439,457             412,386

Securities sold under agreements to repurchase                                                        14,325              11,636
Commercial paper (Master note)                                                                        10,294               7,435
Federal funds purchased                                                                                  --                3,000
Other liabilities                                                                                      3,215               2,483
                                                                                              -------------------------------------
                 Total liabilities                                                                   467,291             436,940
                                                                                             -------------------------------------

ESOP stock subject to put/call option                                                                  3,784               3,313

Shareholders' Equity:
Common stock-$5.00 par value.  Authorized 10,000,000 shares;
   3,059,952 issued and outstanding in 1997;
   3,032,951 issued and 3,023,841 outstanding in 1996                                                 15,300              15,165
Additional paid-in capital                                                                               321                 334
Retained earnings                                                                                     18,309              15,894
Treasury Stock (9,111 shares in 1996)                                                                    --                 (122)
Net unrealized gain on investment securities available for sale,
   net of income taxes                                                                                   129                 166
ESOP stock subject to put/call option, 275,180 common
     shares at $13.75 per share in 1997 and 284,007 common
     shares at $11.67 per share in 1996                                                               (3,784)             (3,313)
                                                                                              -------------------------------------
                 Total shareholders' equity                                                           30,275              28,124
                                                                                              -------------------------------------

                 Total liabilities and shareholders' equity                                         $501,350            $468,377
                                                                                             =====================================
</TABLE>

See accompanying notes to consolidated interim financial statements.


                                        1

<PAGE>




                    PALMETTO BANCSHARES, INC. AND SUBSIDIARY
                   Consolidated Income Statements (Unaudited)
                    Three Months Ended June 30, 1997 and 1996
                  (Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>


<S>                                                                                                <C>               <C>
                                                                                                  1997              1996



                                                                                             -------------------------------------
Interest income:
  Interest and fees on loans                                                                   $7,450              $6,448
  Interest and dividends on investment securities:
     U.S. Treasury and U.S. Government agencies                                                   660                 691
     State and municipal                                                                          466                 589
     Mortgage-backed securities                                                                   445                 154
  Interest on federal funds sold                                                                  111                  44
                                                                                              -------------------------------------
                 Total interest income                                                          9,132               7,926
                                                                                              -------------------------------------

Interest expense:
  Interest on deposits                                                                          3,684               3,169
  Interest on securities sold under agreements to repurchase                                      144                 128
  Interest on federal funds purchased                                                              12                 106
  Interest on commercial paper                                                                     85                  71
                                                                                              -------------------------------------
                 Total interest expense                                                         3,925               3,474
                                                                                              -------------------------------------

                 Net interest income                                                            5,207               4,452
Provision for loan losses                                                                         300                 450
                                                                                              -------------------------------------
                 Net interest income after provision for
                    loan losses                                                                 4,907               4,002
Non-interest income:
  Service charges on deposit accounts                                                             807                 711
  Fees for trust services                                                                         237                 192
  Other income                                                                                    391                 395
                                                                                              -------------------------------------
                 Total non-interest income                                                      1,435               1,298

Non-interest expenses:
  Salaries and other personnel                                                                  2,003               1,598
  Net occupancy                                                                                   332                 371
  Furniture and equipment                                                                         413                 393
  Postage and supplies                                                                            215                 213
  Marketing and advertising                                                                       194                 168
  Telephone                                                                                       124                 114
  Other expenses                                                                                  882                 841
                                                                                           ----------------------------------------

                 Total non-interest expenses                                                    4,163               3,698
                                                                                          ------------------------------------------

                 Income before income taxes                                                     2,179               1,602
Income tax provision                                                                              600                 404
                                                                                         ------------------------------------------

                 Net income                                                                    $1,579              $1,198
                                                                                       ============================================

                 Increase in fair value of ESOP stock                                            (470)               (331)
                                                                                       ============================================

                 Net income on common shares not subject to put/call                           $1,109                $867
                                                                                       ============================================

                 Net income  per common share not subject to put/call                           $0.40               $0.32
                                                                                       =============================================

Cash dividends declared per share                                                               $0.09               $0.07
                                                                                      ==============================================

Weighted average shares outstanding                                                         3,053,820           3,005,829
                                                                                      =============================================

Weighted average shares outstanding not subject to put/call                                 2,760,899           2,722,806
                                                                                      =============================================
</TABLE>
                                                                               

See accompanying notes to consolidated interim financial statements.





                                        2

<PAGE>



                    PALMETTO BANCSHARES, INC. AND SUBSIDIARY
                   Consolidated Income Statements (Unaudited)
                     Six Months Ended June 30, 1997 and 1996
                  (Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>




<S>                                                                                                       <C>               <C>
                                                                                                         1997              1996
                                                                                                   --------------------------------
Interest income:
  Interest and fees on loans                                                                         $14,991             $12,423
  Interest and dividends on investment securities
     U.S. Treasury and U.S. Government agencies                                                        1,110               1,484
     State and municipal                                                                                 918               1,029
     Mortgage-backed securities                                                                          831                 271
  Interest on federal funds sold                                                                         165                  57
                                                                                              -------------------------------------
                 Total interest income                                                                18,015              15,264
                                                                                              -------------------------------------

Interest expense:
  Interest on deposits                                                                                 7,202               6,071
  Interest on securities sold under agreements to repurchase                                             278                 228
  Interest on federal funds purchased                                                                     55                 188
  Interest on commercial paper                                                                           147                 144
                                                                                              -------------------------------------
                 Total interest expense                                                                7,682               6,631
                                                                                              -------------------------------------

                 Net interest income                                                                  10,333               8,633
Provision for loan losses                                                                                600                 750
                                                                                              -------------------------------------
                 Net interest income after provision for
                    loan losses                                                                        9,733               7,883
Non-interest income:
  Service charges on deposit accounts                                                                  1,567               1,325
  Fees for trust services                                                                                473                 402
  Other income                                                                                           787                 700
                                                                                              -------------------------------------
                 Total non-interest income                                                             2,827               2,427

Non-interest expenses:
  Salaries and other personnel                                                                         4,247               3,628
  Net occupancy                                                                                          674                 705
  Furniture and equipment                                                                                812                 734
  Postage and supplies                                                                                   439                 439
  Marketing and advertising                                                                              370                 368
  Telephone                                                                                              258                 212
  Other expenses                                                                                       1,721               1,429
                                                                                              -------------------------------------
                 Total non-interest expenses                                                           8,521               7,515
                                                                                              -------------------------------------

                 Income before income taxes                                                            4,039               2,795
Income tax provision                                                                                   1,108                 702
                                                                                              -------------------------------------

                 Net income                                                                           $2,931              $2,093
                                                                                              =====================================

                 Increase in fair value of ESOP stock                                                   (470)               (331)
                                                                                              =====================================

                 Net income on common shares not subject to put/call                                  $2,461              $1,762
                                                                                              =====================================

                 Net income  per common share not subject to put/call                                  $0.89               $0.65
                                                                                              =====================================

Cash dividends declared per share                                                                       $0.17               $0.13
                                                                                              =====================================

Weighted average shares outstanding                                                                 3,044,800           3,009,333
                                                                                              =====================================

Weighted average shares outstanding not subject to put/call                                         2,754,701           2,724,765
                                                                                              =====================================
</TABLE>

See accompanying notes to consolidated interim financial statements.





                                        3

<PAGE>



                    PALMETTO BANCSHARES, INC. AND SUBSIDIARY
                     Consolidated Statements of Cash Flows (Unaudited)
                       For Six Months Ended June 30, 1997 and 1996
                           (Dollars in Thousands)

<TABLE>
<CAPTION>

<S>                                                                                                     <C>               <C> 
                                                                                                        1997              1996
                                                                                                    -------------------------------
Cash flows from operating activities:
  Net income                                                                                         $2,931               2,093
  Adjustments to reconcile net income to net cash
     provided by operating activities:
                 Depreciation and amortization                                                        1,042                 766
                 Provision for loan losses                                                              600                 750
                 Origination or acquisition of loans held for sale                                  (25,077)            (71,496)
                 Sale of loans held for sale                                                         29,152              63,805
                 Change in accrued interest receivable                                                 (470)             (1,231)
                 Change in other assets                                                              (1,681)             (3,356)
                 Change in other liabilities, net                                                       755                 329
                                                                                                   --------------------------------

                                 Net cash provided by operating activities                            7,252              (8,340)

Cash flows from investing activities:
  Purchase of investment securities held to maturity                                                (17,710)            (23,358)
  Purchase of investment securities available for sale                                               (9,945)             (9,977)
  Proceeds from maturities of investment securities held to maturity                                  3,200               5,000
  Proceeds from maturities of investment securities available for sale                                  800                 682
  Proceeds from sale of investment securities available for sale                                        552              28,980
  Principal paydowns on mortgage-backed securities                                                    1,044               1,102
  Purchase of Federal Home Loan Bank stock                                                           (1,452)                 --
  Net increase in loans                                                                             (13,516)            (54,263)
  Purchases of premises and equipment                                                                  (786)             (1,758)
                                                                                                  --------------------------------

                                 Net cash used in investing activities                              (37,813)            (53,592)

Cash flows from financing activities:
  Net increase in deposit accounts                                                                   26,931               7,007
  Acquisition of deposits, net                                                                           --              53,242
  Net increase in securities sold under agreements to repurchase                                      2,689               5,149
  Net decrease  in commercial paper                                                                   2,859               2,047
  Net increase (decrease) in federal funds purchased                                                 (3,000)              2,675
  Proceeds from issuance of common stock                                                                122                  --
  Purchase of treasury stock                                                                             --                (122)
  Proceeds from sale of treasury stock                                                                  126                  --
  Dividends paid                                                                                       (520)               (401)
                                                                                                  ---------------------------------
                                                                                                

                                 Net cash provided by financing activities                           29,207              69,597
                                                                                                 -----------------------------------

Net increase (decrease) in cash and cash equivalents                                                 (1,354)              7,665
Cash and cash equivalents at beginning of the period                                                 30,324              25,019
                                                                                                  ---------------------------------
                                                                                                

Cash and cash equivalents at end of the period                                                      $28,970              32,684
                                                                                                ===================================

Supplemental Information:
Cash paid during the period for:
     Interest expense                                                                                 7,563               6,529
                                                                                                ===================================
     Income taxes                                                                                       305               1,092
                                                                                                ===================================

Supplemental schedule of non-cash investing and financing transactions:
         Change in unrealized gain on investment securities available for sale                          (37)               (709)
                                                                                                ===================================
</TABLE>

See accompanying notes to consolidated interim financial statements.





                                        4

<PAGE>



                    PALMETTO BANCSHARES, INC. AND SUBSIDIARY
               Notes To Consolidated Interim Financial Statements

1.  Basis of Presentation

  The accompanying unaudited consolidated interim financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements are not included herein.
The interim statements should be read in conjunction with the financial
statements and notes thereto included in Palmetto Bancshares, Inc.'s (the
Company's) Annual Report on Form 10-K for the year ended December 31, 1996.
     In the Company's opinion, all adjustments necessary for a fair presentation
of these interim statements have been included and are of a normal and recurring
nature. The results of operations for the six-month period ended June 30, 1997
are not necessarily indicative of the results which may be expected for the
entire year.

2.  Principles of Consolidation

   The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, The Palmetto Bank (the Bank), and Palmetto Capital,
Inc., a wholly-owned subsidiary of The Palmetto Bank. The Bank provides a
full-range of banking services, including the taking of deposits and the making
of loans. Palmetto Capital, Inc. offers the brokerage of stocks, bonds, mutual
funds and unit investment trusts. Palmetto Capital, Inc. also offers advisory
services and variable rate annuities. In consolidation, all significant
intercompany accounts and transactions have been eliminated.



                                        5

<PAGE>



                            PALMETTO BANCSHARES, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 1996
TO JUNE 30, 1997


Assets

     Liquid assets which include cash, federal funds sold, and investments
available for sale increased by $7.2 million, or 15%, for the six-month period.
This increase was largely due to the purchase of $10.0 million in available for
sale securities, reduced by maturities of $800,000 and sales of $552,000. This
increase was partially offset by a decrease in cash and due from banks of
$850,000 and a decrease in federal funds sold of $504,000 due to better cash
management and a reduction in the amount of required reserves. This reduction in
reserves is due to the reclassification of certain deposit accounts from
reservable to non- reservable categories.

     Early in 1996, application was made by the Bank for membership in the
Federal Home Loan Bank of Atlanta (FHLB). Membership requirements were approved
in June, and the required investment of $1,452,000 was made at that time. Access
to additional bank liquidity, loan funding, and investment opportunities are
among the options available to the Bank through this membership.

     Investment securities held to maturity increased during the six-month
period by $13.4 million, or 20%. This increase was due to purchases of $17.7
million with the funds received from the implementation of certain new cash
management strategies and the reduction in the amount of required reserves.
These purchases were offset with maturities of $3.2 million and with principal
pay downs on mortgage-backed securities of $1.1 million.

     Loans, net, increased by $12.9 million, or 4%, during the six-month period
as a result of normal growth. The allowance for loan losses was increased to
1.42% from 1.35% at June 30, 1997 and 1996, respectively.

     At June 30, 1997, the Company had no loans held for sale due to a
reorganization in the Bank's mortgage servicing department. The Bank is
currently not actively purchasing and originating mortgage loans to be sold. The
Bank plans to re-engage in these activities in the future, but not to the same
extent or volume as before. The Bank continues to service its portfolio of loans
sold. These loans serviced for the benefit of others amounted to approximately
$155.4 million at June 30, 1997.

     The Bank began recognizing originated mortgage servicing rights (OMSR's)
and purchased mortgage servicing rights (PMSR's) in the second quarter of 1996
for loans sold with servicing retained with the startup of its mortgage
servicing operations. The mortgage servicing rights related to the mortgage
servicing department's activities are approximately $1.9 million at June 30,
1997.

     Other assets increased by $1.4 million, or 18%, due to the aforementioned
mortgage servicing rights. This increase was slightly offset with amortization
of various prepaids and intangibles.



                                        6

<PAGE>



Liabilities and Shareholders' Equity

    Deposit balances increased by 7% during the period, from $412.4 million to
$439.5 million. The increase was due to normal growth.

     Securities sold under agreements to repurchase have increased by $2.7
million or 23%, and commercial paper associated with the alternative commercial
sweep accounts (master note program) increased by $2.9 million or 38%. These
changes are the result of normal fluctuations in the accounts. Federal funds
purchased decreased by $3 million due to normal fluctuations.

     Total shareholders equity increased by $2.2 million, for the six-month
period as a result of net income of $2.9 million; less dividends paid of
$520,000; a decrease in the unrealized gain on investment securities available
for sale net of income taxes of $37,000; proceeds from the issuance of common
stock for $122,000; proceeds from the sale of treasury stock of $126,000; and
reduced by the increase in the reclassification of the Employee Stock Ownership
Plan (ESOP) shares subject to put/call of $470,000.

     The stock in the ESOP has a put and a call feature if the stock is not
"readily tradable on an established market." A 1995 private letter ruling by the
IRS clarified that such term means listed on a national securities exchange.
Since the Company's stock is not listed on a national securities exchange, the
shares in the ESOP Plan and shares distributed in 1996 are subject to the
put/call feature. Accordingly, 275,180 shares are recorded outside of
shareholders' equity at their fair value, which is determined annually by an
independent valuation. The most recent valuation dated March 4, 1997, values the
stock at $13.75 per share. The Company's Board of Directors voted to terminate
the ESOP effective February 28, 1997. The shares distributed in 1997 due to the
termination of the ESOP will be subject to the put/call until June 29, 1998.

Liquidity

     The liquidity ratio is an indication of a company's ability to meet its
short-term funding obligations. The Company's policy is to maintain a liquidity
ratio between 15% - 25%. At March 31, 1997, the Company's liquidity ratio was
21%.

     The Company has certain cash needs, including general operating expenses
and the payment of dividends and interest on borrowing. The Company currently
has no debt outstanding and has declared $0.17 per share in dividends so far in
1997. There can be no guarantee, however, that any additional dividends will be
paid. Liquidity is provided from the Company's subsidiary, the Bank. The only
restrictions on the amount of dividends available for payment to Bancshares are
guidelines established by regulatory authorities for capital to asset ratios.
The South Carolina Board of Financial Institutions' guideline suggests a primary
capital to asset ratio of at least 7%. The Bank's current primary capital ratio
is 7.36%; therefore, at June 30, 1997, the Bank had $1.8 million of excess
retained earnings available for the payment of dividends. The Bank plans to
continue its quarterly dividend payout.


                                        7

<PAGE>



Capital Resources

    As of June 30, 1997, the Company and the Bank were in compliance with each
of the applicable regulatory capital requirements and met or exceeded the
"adequately capitalized" regulatory guidelines. The table below sets forth
various capital ratios for the Company and the Bank:

<TABLE>
<CAPTION>


                                                                  Adequately
                                              As of               Capitalized             Well Capitalized
                                             6/30/97              Requirement                Requirement
---------------------------------------- ---------------- ---------------------------- -----------------------
<S>                                           <C>                    <C>                       <C>
Company:
   Total Risk-based Capital                   9.37%                  8.00%                     10.00%
   Tier 1 Risk-based Capital                  8.12                   4.00                       6.00
   Leverage Ratio                             5.81                   4.00                       5.00

Bank:
   Total Risk-based Capital                   9.16                   8.00                      10.00
   Tier 1 Risk-based Capital                  7.91                   4.00                       6.00
   Leverage Ratio                             5.65                   4.00                       5.00
Primary Capital to Assets                     7.36                   7.00                       7.00
---------------------------------------- ---------------- ---------------------------- -----------------------

</TABLE>

     Because the Company's total risk-based capital ratio is 9.37%, the Company
is defined to be "adequately-capitalized" under currently applicable regulatory
guidelines. The Company's strategic plan for controlled growth and profit
improvement reflects sufficient internally generated capital to return the
risk-weighted ratios to the "well-capitalized" guidelines.



                                        8

<PAGE>



Accounting and Reporting Matters

     In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective
Date of Certain Provisions of SFAS No. 125, an amendment of SFAS No. 125, which
was effective December 31, 1996. This statement delays the effective date of
certain provisions of SFAS No. 125 until after December 31, 1997. The amended
provisions include those related to the transfers of financial assets and
secured borrowings. The provisions in SFAS No. 125 related to servicing assets
and liabilities are not delayed by this amendment. The adoption of this
statement did not have a material effect on the Company.

     In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which
is effective for both interim and annual periods ending after December 15, 1997.
This statement supersedes Accounting Principles Board Opinion No. 15, Earnings
per Share. The purpose of this statement is to simplify current reporting and
make U.S. reporting comparable to international standards. The statement
requires dual presentation of basic and diluted EPS by entities with complex
capital structures (as defined by the statement). The Company anticipates that
adoption of this standard will not have a material affect on EPS.

     Also, in February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, which is effective for financial statements
for periods ending after December 15, 1997. This statement applies to both
public and nonpublic entities. The new statement requires no change for entities
subject to the existing requirements. The Company anticipates that adoption of
this standard will not have a material affect on the Company.

     In June 1997, the FASB issued SFAS Nos. 130 and 131, Reporting
Comprehensive Income and Disclosures about Segments of an Enterprise and Related
Information, respectively. Both statements are effective for financial
statements for fiscal years beginning after December 15, 1997, with earlier
application permitted. SFAS No. 130 requires that changes in the amounts of
comprehensive income items be shown in a primary financial statement. SFAS No.
131 changes the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
While these statements may increase the detail of information the Company will
have to disclose, the adoption of these standards is not expected to have a
material affect on the Company.



                                        9

<PAGE>



COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 1997 AND 1996


     Net income for the three months ended June 30, 1997 was $1.6 million, an
increase of 32% from the $1.2 million reported for the same period in 1996. Net
income per common share not subject to put/call was $0.40 for the 1997 period as
compared with $0.32 for the comparable period in 1996.

Net Interest Income

     The largest component of the Company's net income is the Bank's net
interest income, defined as the difference between gross interest and fees on
earnings assets, primarily loans and investment securities, and interest paid on
deposits and borrowed funds. Net interest income is affected by the interest
rates earned or paid and by volume changes in loans, securities, deposits, and
borrowed funds.

     For the three-month period ended June 30, 1997, net interest income was
$5.2 million, which represented a 17% increase from the same period in 1996.
This increase was the result of increases in the volume of earning assets.
Earning assets averaged $452.2 million and $393.2 million during the second
quarters of 1997 and 1996, respectively. The increases in volume were due to the
growth of loans and investments compared to year-end 1996. The average net
interest margin for the 1997 period was 4.62%, compared to 4.55% for the same
period in 1996.

     Interest income on loans increased 16% due to increased volume. Interest
income on investment securities remained fairly constant at $1.6 million during
the 1997 period compared to the corresponding period in 1996 due to increased
volume offset by a reduction in the weighted average rate earned on the
portfolio. Interest income on federal funds sold increased due to increased
volume of federal funds sold compared to the same period last year. The yield on
average earning assets, which includes loans and investment securities,
decreased from 8.11% for the three months ended June 30, 1996 to 8.10% for the
three months ended June 30, 1997. The prime interest rate remained constant at
8.5% for the quarter ended June 30, 1997, but was 8.25% one year ago.

     Total interest expense increased by 13% during the 1997 period mostly due
to an increased volume of deposits at June 30, 1997, compared to June 30, 1996.

     The profitability of the Bank is influenced significantly by management's
ability to control the relationship between rate sensitive assets and
liabilities, and the current interest rate environment. The Bank's goal is to
minimize interest rate risk between interest bearing assets and liabilities at
various maturities through its Asset-Liability Management (ALM). ALM involves
managing the mix and pricing of assets and liabilities in the face of uncertain
interest rates and an uncertain economic outlook. It seeks to achieve steady
growth of net interest income with an acceptable amount of interest rate risk
and sufficient liquidity. The process provides a framework for determining, in
conjunction with the profit planning process, which elements of the Company's
profitability factors can be controlled by management. Understanding the current
position and implications of past decisions is necessary in providing direction
for the future financial management of the Company. The Company uses an
asset-liability model to determine the appropriate strategy for current
conditions.



                                       10

<PAGE>



       Interest sensitivity management is part of the asset-liability management
process. Interest sensitivity gap (GAP) is the difference between total rate
sensitive assets and rate sensitive liabilities in a given time period. The
Company's current GAP analysis reflects that in periods of increasing interest
rates, rate sensitive assets will reprice slower than rate sensitive
liabilities. The Company's GAP analysis also shows that at the interest
repricing of one year, the Company's net interest margin would be adversely
impacted. This analysis, however, does not take into account the dynamics of the
marketplace. GAP is a static measurement that assumes if the prime rate
increases by 100 basis points, all assets and liabilities that are due to
reprice will increase by 100 basis points at the next opportunity. However, the
Company is actually able to experience a benefit from rising rates in the short
term because deposit rates do not follow the national money market. They are
controlled by the local market. Loans do follow the money market; so when rates
increase they reprice immediately, but the Company is able to manage the deposit
side. The Company generally does not raise deposit rates as fast or as much. The
Company also has the ability to manage its funding costs by choosing alternative
sources of funds.

       The Company's current GAP position would also be interpreted to mean that
in periods of declining interest rates, the Company's net interest margin would
benefit. However, competitive pressures in the local market may not allow the
Company to lower rates on deposits, but force the Company to lower rates on
loans. Furthermore, the Company can only lower rates on deposits to the extent
that the floors will allow.

       Because the Company's management feels that GAP analysis is a static
measurement, it manages its interest income through its asset/liability
strategies which focus on a net interest income model based on management's
projections. The Company has a targeted net interest income range of plus or
minus twenty percent based on a 300 basis point shock over twelve months. The
asset/liability committee meets weekly to address interest pricing issues, and
this model is reviewed monthly. Management will continue to monitor its
liability sensitive position in times of higher interest rates which might
adversely affect its net interest margin.

Provision for Loan Losses

       The provision for loan losses was $300,000 for the three months ended
June 30, 1997 compared to $450,000 for the three months ended June 30, 1996. The
provision is adjusted each month to reflect loan volume growth and allow for
loan charge-offs and recoveries. Management's objective is to maintain the
allowance for loan losses at an adequate level to cover potential future losses
in the portfolio. Additions to the allowance for loan losses are based on
management's evaluation of the loan portfolio under current economic conditions,
past loan loss experience, and such other factors which, in management's
judgment, deserve recognition in estimating loan losses. Loans are charged off
when, in the opinion of management, they are deemed to be uncollectible.
Recognized losses are charged against the allowance, and subsequent recoveries
are added to the allowance. Loans over 90 days delinquent, and on non-accrual
amounted to approximately $1,617,000 and $634,000 at June 30, 1997 and 1996,
respectively. While the amount of non-accrual loans has increased, the net
charge-off ratio has remained low at 0.25%. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. The allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment, based upon information that is available to them at the
time of their examination.





                                       11

<PAGE>



Other Operating Income

       Total non-interest income increased by $137,000, or 11%, for the three
months ended June 30, 1997, as compared to the same period in 1996. The largest
portion of this increase can be attributed to service charges on deposit
accounts, which increased by $96,000, or 14%, during the 1997 period compared to
the same period in 1996 due primarily to increased deposit accounts and
increased transactions.

       The second largest contributor to non-interest income is fees for trust
services, which increased $45,000, or 23%, due to new business and increased
assets under management. Assets under management increased $8.0 million, or 6%,
during the three months ended June 30, 1997, compared to growth of $205,000, or
2%, for the same period in 1996.

Other Operating Expenses

       Total non-interest expenses increased by $465,000, or 13%, during the
1997 three-month period over the same period in 1996. The largest contributor to
non-interest expense was salaries and other personnel expense which increased
$405,000, or 25%, due to normal salary increases and increased personnel in the
branches, telephone banking center, and trust department. The second largest
contributor was other expenses, which increased $41,000, or 5%, due to normal
growth and activity.

Income Taxes

       The Company incurred income tax expense of $600,000 for the 1997
three-month period compared to $404,000 for the same period in 1996 due to the
increase in taxable income. This expense is based on an expected effective tax
rate of approximately 27%.



COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996

       Net income for the six months ended June 30, 1997 was $2.9 million, an
increase of 40% from the $2.1 million reported for the same period in 1996. Net
income per common share not subject to put/call was $0.89 for the 1997 period as
compared with $0.65 for the comparable period in 1996.

Net Interest Income

       The largest component of the Company's net income is the Bank's net
interest income, defined as the difference between gross interest and fees on
earnings assets, primarily loans and investment securities, and interest paid on
deposits and borrowed funds. Net interest income is affected by the interest
rates earned or paid and by volume changes in loans, securities, deposits, and
borrowed funds.

       For the six-month period ended June 30, 1997, net interest income was
$10.3 million, which represented a 20% increase from the same period in 1996.
This increase was the result of increases in the volume of earning assets.
Earning assets averaged $442.7 million and $370.8 million during the first six
months of 1997 and 1996, respectively. The increases in volume were due to the
growth of loans and investments compared to year-end 1996. The average net
interest margin for the 1997 period was 4.71%, compared to 4.68% for the

                                       12

<PAGE>



same period in 1996.

       Interest income on loans increased 21% due to increased volume. Despite
growth in the investment security portfolio, interest income on investment
securities remained fairly constant at $2.9 million during the 1997 period
compared to the corresponding period in 1996 due to a lower weighted average
rate (WAR) earned on the portfolio. At June 30, 1996, the WAR on the portfolio
was 7.16%, with a weighted average life (WAL) of 5.2 years. At June 30, 1997,
the WAR was 7.01%, with a WAL of 4.75 years. The reduction in the WAR appears
reasonable based on the decrease in the WAL of the portfolio and the decrease in
the Treasury Yield curve in the last 12 months. At June 30, 1997, the Treasury
Yield curve for a 5 year term was 6.32%, compared to 6.47% one year ago.
Interest income on federal funds sold increased due to increased volume of
federal funds sold compared to the first six months of last year. The yield on
average earning assets, which includes federal funds sold, loans and investment
securities, decreased from 8.28% for the six months ended June 30, 1996 to 8.21%
for the six months ended June 30, 1997. The prime interest rate remained
constant at 8.25% for the first quarter; and at 8.50% for the second quarter.

       Total interest expense increased by 16% during the 1997 period mostly due
to an increased volume of deposits at June 30, 1997, compared to June 30, 1996.
Average total interest-bearing liabilities, increased by 20% from June 30, 1996
to June 30, 1997. The average rate paid on interest bearing liabilities
decreased from 4.10% during the six-month period in 1996, to 4.03% during the
1997 period.

       The profitability of the Bank is influenced significantly by management's
ability to control the relationship between rate sensitive assets and
liabilities, and the current interest rate environment. See further discussion
under "Comparison of the Results of Operations for the Three Months Ended June
30, 1997 and 1996" above.

Provision for Loan Losses

       The provision for loan losses was $600,000 for the six months ended June
30, 1997 compared to $750,000 for the six months ended June 30, 1996. See
further discussion under "Comparison of the Results of Operations for the Three
Months Ended June 30, 1997 and 1996" above.

Other Operating Income

       Total non-interest income increased by $400,000, or 16%, for the six
months ended June 30, 1997, as compared to the same period in 1996. The largest
portion of this increase can be attributed to service charges on deposit
accounts, which increased by $242,000, or 18%, during the 1997 period compared
to the same period in 1996 due primarily to increased deposit accounts and
increased transactions.

       The second largest contributor to non-interest income is fees for trust
services, which increased $71,000, or 18%, due to new business and increased
assets under management. Assets under management were $136.9 million and $108.4
million at June 30, 1997 and 1996, respectively, representing a 26% increase.

       Another component of non-interest income is other income, which increased
$87,000, or 12%, due to normal growth and activity and income related to the
three branches acquired in April of 1996. The first six months of 1996 only had
2.5 months of acquisition-related income, whereas the first six months of 1997
has six months of increased income.


                                       13

<PAGE>



Other Operating Expenses

       Total non-interest expenses increased by $1.0 million, or 13%, during the
1997 six-month period over the same period in 1996. The largest contributor to
non-interest expense was salaries and other personnel expense which increased
$619,000, or 17%, due to normal salary increases and increased personnel. The
number of full-time equivalent employees at June 30, 1997 was 264, compared to
243 at June 30, 1996.

       The second largest contributor was other expenses, which increased
$292,000 or 20%. Other expense consists of many items, including goodwill
amortization and core deposit premium amortization related to the First Union
branch acquisition in the second quarter of 1996. These two expenses combined
have increased $113,000 compared to the same period in prior year because there
is six months of amortization in 1997 compared to only 2.5 months in 1996. Other
expenses also includes the FDIC assessment which has increased $84,000 compared
to prior year because the Company is now "adequately-capitalized" under
currently applicable regulatory guidelines, where it was "well-capitalized" in
prior year. See discussion above under "Capital Resources." This category also
includes bank service charges which have increased $30,000 since this time last
year due to a management decision to pay higher service charges in lieu of
maintaining higher compensating balances at correspondent banks. Management
feels that the Bank can earn enough of a return from investing these funds in
alternative investment vehicles to more than offset the increased service
charges. The remainder of the increase in other expenses is due to normal growth
and activity.

Income Taxes

       The Company incurred income tax expense of $1.1 million for the 1997
six-month period compared to $702,000 for the same period in 1996 due to the
increase in taxable income. This expense is based on an expected effective tax
rate of approximately 27%.


INDUSTRY DEVELOPMENTS

       Certain proposed industry-related legislation could have an effect on
both the costs of doing business and the competitive factors facing the
financial institution industry. Because of the uncertainty of the final terms
and likelihood of passage of the proposed legislation, the Company is unable to
assess the impact of any proposed legislation on its financial condition or
operations at this time.

                                       14

<PAGE>



                    PALMETTO BANCSHARES, INC. AND SUBSIDIARY

                           Part II - Other Information


Item 1. Legal Proceedings


       Palmetto Bancshares, Inc. (the Company) is not engaged in any legal
       proceedings. From time to time The Palmetto Bank (the Bank) is involved
       in legal proceedings incidental to its normal course of business as a
       bank. Management believes none of these proceedings is likely to have a
       materially adverse effect on the business of the Company or the Bank.


Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

         Exhibit No.                Description

         3.1.1                      Articles of Incorporation filed on May 13,
                                    1982 in the office of the Secretary of State
                                    of South Carolina: Incorporated by reference
                                    to Exhibit 3 to the Company's Registration
                                    Statement on Form S-4, No. 33-19367, filed
                                    with the Securities and Exchange Commission
                                    on December 30, 1987

         3.1.2                      Articles of Amendment filed on May 5, 1988
                                    in the office of the Secretary of State of
                                    South Carolina: Incorporated by reference to
                                    Exhibit 4.1.2 to the Company's Registration
                                    Statement on Form S-8, filed with the
                                    Securities and Exchange Commission on August
                                    20, 1992

         3.1.3                      Articles of Amendment filed on January 26,
                                    1989 in the office of the Secretary of State
                                    of South Carolina: Incorporated by reference
                                    to Exhibit 4.1.3 to the Company's
                                    Registration Statement on Form S-8, filed
                                    with the Securities and Exchange Commission
                                    on
                                    August 20, 1992

         3.1.4                      Articles of Amendment filed on April 23,
                                    1990 in the office of the Secretary of State
                                    of South Carolina: Incorporated by reference
                                    to Exhibit 4.1.4 to the Company's
                                    Registration Statement on Form S-8, filed
                                    with the Securities and Exchange Commission
                                    on
                                    August 20, 1992

         3.1.5                      Articles of Amendment filed on October 16,
                                    1996 in the office of the Secretary of State
                                    of South Carolina: Incorporated by reference
                                    to Exhibit 3.1.5 of the Company's quarterly
                                    report on Form 10-Q for the
                                         
                                       15

<PAGE>


                                    fiscal quarter ended September 30, 1996.
         3.2.1                      By-Laws adopted April 10, 1990: Incorporated
                                    by reference to Exhibit 3.2.1 to the
                                    Company's 10-K, filed with the Securities
                                    and Exchange Commission on March 31, 1997.

         3.2.2                      Amendment to By-Laws dated April 12, 1994:
                                    Incorporated by reference to Exhibit 3.2.2
                                    to the Company's 10-K, filed with the
                                    Securities and Exchange Commission on March
                                    31, 1997.

         4.1.1                      Articles of Incorporation of the
                                    Registrant: Included in Exhibits 3.1.1 -- .5

         4.2                        Bylaws of the Registrant: Included in
                                    Exhibits 3.2.1 -- .2.

         4.3                        Specimen Certificate for Common Stock:
                                    Incorporated by reference to Exhibit 4.3 to
                                    the Company's Registration Statement on Form
                                    S-8, Commission File No. 33-51212, filed
                                    with the Securities and Exchange Commission
                                    on August 20, 1992

         27.1*                      Financial Data Schedule

         * Filed herewith.


(b) Reports on Form 8-K

         The Company did not file any reports on Form 8-K during the three
         months ended June 30, 1997.





                                       16

<PAGE>



                                   SIGNATURES



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



PALMETTO BANCSHARES, INC.



By:

/s/ L. Leon Patterson
 L. Leon Patterson
 Chairman and Chief Executive Officer


/s/ Paul W. Stringer
 Paul W. Stringer
 President and Chief Operating Officer
(Chief Accounting Officer)

Date: August 8, 1997



                                       17

<PAGE>



                                  EXHIBIT INDEX

Exhibit No.                         Description                                

         3.1.1                      Articles of Incorporation filed on May 13,
                                    1982 in the office of the Secretary of State
                                    of South Carolina: Incorporated by reference
                                    to Exhibit 3 to the Company's Registration
                                    Statement on Form S-4, No. 33-19367, filed
                                    with the Securities and Exchange Commission
                                    on December 30, 1987

         3.1.2                      Articles of Amendment filed on May 5, 1988
                                    in the office of the Secretary of State of
                                    South Carolina: Incorporated by reference to
                                    Exhibit 4.1.2 to the Company's Registration
                                    Statement on Form S-8, filed with the
                                    Securities and Exchange Commission on August
                                    20, 1992

         3.1.3                      Articles of Amendment filed on January 26,
                                    1989 in the office of the Secretary of State
                                    of South Carolina: Incorporated by reference
                                    to Exhibit 4.1.3 to the Company's
                                    Registration Statement on Form S-8, filed
                                    with the Securities and Exchange Commission
                                    on
                                    August 20, 1992

         3.1.4                      Articles of Amendment filed on April 23,
                                    1990 in the office of the Secretary of State
                                    of South Carolina: Incorporated by reference
                                    to Exhibit 4.1.4 to the Company's
                                    Registration Statement on Form S-8, filed
                                    with the Securities and Exchange Commission
                                    on
                                    August 20, 1992

         3.1.5                      Articles of Amendment filed on October 16,
                                    1996 in the office of the Secretary of State
                                    of South Carolina: Incorporated by reference
                                    to Exhibit 3.1.5 of the Company's quarterly
                                    report on Form 10-Q for the fiscal quarter
                                    ended September 30, 1996.

         3.2.1                      By-Laws adopted Arpil 10, 1990: Incorporated
                                    by reference to Exhibit 3.2.1 to the
                                    Company's 10-K, filed with the Securities
                                    and Exchange Commission on March 31, 1997.

         3.2.2                      Amendment to By-Laws dated April 12, 1994:
                                    Incorporated by reference to Exhibit 3.2.2
                                    to the Company's 10-K, filed with the
                                    Securities and Exchange Commission on March
                                    31, 1997.

         4.1.1                      Articles of Incorporation of the
                                    Registrant: Included in Exhibits 3.1.1 -- .5

         4.2                        Bylaws of the Registrant: Included in
                                    Exhibits 3.2.1 -- .2.

         4.3                        Specimen Certificate for Common Stock:
                                    Incorporated by reference to

                                       18

<PAGE>



                                    Exhibit 4.3 to the Company's Registration
                                    Statement on Form S-8, Commission File No.
                                    33-51212, filed with the Securities and
                                    Exchange Commission on August 20, 1992

         27.1*                      Financial Data Schedule

         * Filed herewith.



                                       19

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