SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

(Mark One)
           X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1998

                                       OR

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

          For the transition period from _____________ to ____________

                         Commission file number 0-18488

                         FIRST CHEROKEE BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

                               GEORGIA 58-1807887
                  (State or other jurisdiction of (IRS Employer
               incorporation or organization) Identification No.)

                    9860 Highway 92, Woodstock, Georgia 30188
                    (Address of principal executive offices)

                                  770-591-9000
                           (Issuer's telephone number)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.

X Yes      No

The number of shares  outstanding of  registrant's  common stock par value $1.00
per share at September 30, 1998 was 553,804 shares.

Traditional Small Business Disclosure Format (check one): ___ Yes    X  No

<PAGE>

                         First Cherokee Bancshares, Inc.
                         Quarterly Report on Form 10-QSB
                    For the Quarter Ended September 30, 1998

                                      Index
                                                                        Page No.
Part I.  Financial Information

         Consolidated Financial Statements (unaudited)
         Consolidated Balance Sheet at September 30, 1998                      2

         Consolidated Statements of Earnings (unaudited)
         for the nine months ended September 30, 1998 and 1997                 3

         Consolidated Statements of Earnings (unaudited)
         for the three months ended September 30, 1998 and 1997                4

         Consolidated Statements of Comprehensive Income (unaudited)
         for the nine months ended September 30, 1998 and 1997                 5

         Consolidated Statements of Comprehensive Income (unaudited)
         for the three months ended September 30, 1998 and 1997                6

         Consolidated Statements of Cash Flows (unaudited)
         for the nine months ended September 30, 1998 and 1997                 7

         Notes to Consolidated Financial Statements (unaudited)                8

Item 2.  Management's Discussion and Analysis of Financial Condition          11
         and Results of Operations

Part II.  Other Information
Item 1.  Legal Proceedings                                                    18
Item 2.  Changes in Securities and Use of Proceeds                            18
Item 3.  Defaults Upon Senior Securities                                      18
Item 4.  Submission of Matters to a Vote of  Security Holders                 18
Item 5.  Other Information                                                    18
Item 6.  Exhibits and Reports on Form 8-K                                     18
Item 7.  Signatures                                                           20


<PAGE>


                         First Cherokee Bancshares, Inc.
                           Consolidated Balance Sheet
                               September 30, 1998
                                   (Unaudited)


                                        Assets
Cash & due from banks, including $6,017,666
     bearing interest ..........................................   $  9,372,587
Federal funds sold .............................................              0
                                                                              -
          Total cash & cash equivalents ........................      9,372,587
Investment securities available for sale,
     at fair value .............................................        592,646
Loans, less allowance for loan losses
     of $1,403,874 .............................................     78,814,480
Premises and equipment, net ....................................      3,831,854
Accrued interest receivable and other assets ...................      6,338,135
                                                                   ------------
                    Total Assets ...............................   $ 98,949,702
                                                                   ============

                         Liabilities and Stockholders' Equity
Liabilities:
Deposits:
     Interest-bearing deposits .................................   $ 75,994,661
     Noninterest-bearing deposits ..............................     14,743,152
                                                                     ----------
          Total deposits .......................................     90,737,813
Accrued interest payable and other liabilities .................      1,104,808
                                                                      ---------
                    Total Liabilities ..........................     91,842,621

Stockholders' Equity:
Common stock ($1 par value; 10,000,000
     shares authorized, 591,544 shares issued) .................        591,544
Additional paid-in-capital .....................................      5,273,257
Retained earnings ..............................................      1,842,227
Treasury Stock (37,740 shares acquired
     at cost) ..................................................       (602,716)
Accumulated other comprehensive
     income, net of tax ........................................          2,769
                                                                          -----
               Total Stockholders' Equity ......................      7,107,081
                                                                      ---------
                    Total Liabilities and Stockholders' Equity .   $ 98,949,702
                                                                   ============

                    See notes to consolidated financial statements



<PAGE>


                         First Cherokee Bancshares, Inc.
                       Consolidated Statements of Earnings
                     For the nine months ended September 30,
                                   (Unaudited)

Interest income:                                              1998         1997
                                                         ----------   ----------
     Interest and fees on loans ......................   $5,920,810   $5,127,986
     Interest on investment securities ...............       36,533       39,804
     Interest on federal funds sold/overnight funds ..      238,418      182,890
                                                         ----------   ----------
          Total interest income ......................    6,195,761    5,350,680

Interest expense on deposits .........................    2,937,749    2,640,524
                                                         ----------   ----------

Net interest income ..................................    3,258,012    2,710,156

Provision for loan losses ............................      374,921      479,838
                                                         ----------   ----------

Net interest income after provision
     for loan losses .................................    2,883,091    2,230,318
                                                         ----------   ----------

Other income:
     Gain on sale of investment securities ...........            0            0
     Gain on sales of loans ..........................    1,029,760    1,037,856
     Service charges on deposit accounts
          and other income ...........................      774,001      644,878
     Gain on sale of other assets ....................       40,036            0
                                                         ----------   ----------
Total other income ...................................    1,843,797    1,682,734
                                                         ----------   ----------

Other expense:
     Salaries and employee benefits ..................    2,022,948    1,512,613
     Occupancy .......................................      506,784      373,433
     Other operating expense .........................    1,288,336    1,853,995
                                                         ----------   ----------
Total other expense ..................................    3,818,068    3,740,041
                                                         ----------   ----------

Earnings before income taxes .........................      908,820      173,011

Income Tax expense ...................................      348,015       64,526
                                                         ----------   ----------

Net earnings .........................................   $  560,805   $  108,485
                                                         ==========   ==========

Basic earnings per share .............................   $     0.98   $     0.19
                                                         ==========   ==========
Diluted earnings per share ...........................   $     0.85   $     0.16
                                                         ==========   ==========

                 See notes to consolidated financial statements



<PAGE>


                         First Cherokee Bancshares, Inc.
                       Consolidated Statements of Earnings
                    For the three months ended September 30,
                                   (Unaudited)

Interest income:                                            1998          1997
                                                      -----------   -----------
     Interest and fees on loans ...................   $ 2,008,289   $ 1,708,430
     Interest on investment securities ............        12,130        12,349
     Interest on federal funds sold/overnight funds       111,089        59,675
                                                      -----------   -----------
          Total interest income ...................     2,131,508     1,780,454

Interest expense on deposits ......................     1,027,575       910,887
                                                      -----------   -----------

Net interest income ...............................     1,103,933       869,567

Provision for loan losses .........................       101,811       187,703
                                                      -----------   -----------

Net interest income after provision
     for loan losses ..............................     1,002,122       681,864
                                                      -----------   -----------

Other income:
     Gain on sale of investment securities ........             0             0
     Gain on sales of loans .......................       268,669       282,703
     Service charges on deposit accounts
          and other income ........................       230,569       216,020
     Gain on sale of other assets .................        55,807             0
                                                      -----------   -----------
Total other income ................................       555,045       498,723
                                                      -----------   -----------

Other expense:
     Salaries and employee benefits ...............       727,141       473,276
     Occupancy ....................................       191,734       125,918
     Other operating expense ......................       444,701     1,094,736
                                                      -----------   -----------
Total other expense ...............................     1,363,576     1,693,930
                                                      -----------   -----------

Earnings before income taxes ......................       193,591      (513,343)

Income Tax expense ................................        75,715      (194,339)
                                                      -----------   -----------

Net earnings ......................................   $   117,876   ($  319,004)
                                                      ===========   ===========

Basic earnings per share ..........................   $      0.21   ($     0.55)
                                                      ===========   ===========
Diluted earnings per share ........................   $      0.18   ($     0.55)
                                                      ===========   ===========

                 See notes to consolidated financial statements



<PAGE>


                         First Cherokee Bancshares, Inc.
                 Consolidated Statements of Comprehensive Income
                     For the nine months ended September 30,
                                   (Unaudited)

                                                              1998        1997
                                                          ---------   ---------

Net earnings ..........................................   $ 560,805   $ 108,485
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available 
     for sale:
 Unrealized gains (losses) arising during the 
 period, net of tax of $667 and $2,026, respectively          1,093      (3,321)
Less: Reclassification adjustment for gains (losses)
 included in net earnings, net of tax ...............             0           0
                                                          ---------   ---------
Other comprehensive income (loss) .....................       1,093      (3,321)
                                                          ---------   ---------

Comprehensive income ..................................   $ 561,898   $ 105,164
                                                          =========   =========

                 See Notes to Consolidated Financial Statements



<PAGE>


                         First Cherokee Bancshares, Inc.
             Consolidated Statements of Comprehensive Income (Loss)
                    For the three months ended September 30,
                                   (Unaudited)

                                                              1998        1997
                                                         ----------   ---------

Net earnings (loss) ...................................   $ 117,876   ($319,004)
Other comprehensive income, net of tax:
Unrealized gains on securities available 
     for sale:
 Unrealized gains arising during the period, net
 of tax of $831 and $1,611 respectively ...............       1,362       2,641
Less: Reclassification adjustment for gains
 included in net earnings, net of tax .................           0           0
                                                          ---------   ---------
Other comprehensive income .............................      1,362       2,641
                                                          ---------   ---------

Comprehensive income (loss) ...........................   $ 119,238   ($316,363)
                                                          =========   =========

                 See Notes to Consolidated Financial Statements



<PAGE>


                         First Cherokee Bancshares, Inc.
                      Consolidated Statements of Cash Flows
                     For the nine months ended September 30,
                                   (Unaudited)
                                                           1998            1997
                                                   ------------    ------------
Cash flows from operating activities:
Net earnings ....................................  $    560,805    $    108,485
Adjustments to reconcile net earnings to net cash
provided (used) in operating activities:
Depreciation, amortization and accretion ........       147,883          77,656
Provision for loan losses .......................       374,921         479,838
Provision for losses on other real estate .......             0         118,866
Securities gains ................................             0               0
Change in accrued interest payable and
other liabilities ...............................      (956,813)       (124,482)
Change in accrued interest receivable and
other assets ....................................       (39,373)     (1,074,849)
                                                   ------------    ------------
Total adjustments ...............................      (473,382)       (522,971)
                                                   ------------    ------------
Net Cash provided (used) by operating activities         87,423        (414,486)

Cash flows from investing activities:
Purchases of investment securities ..............      (500,000)              0
Proceeds from sale of investment securities .....             0               0
Proceeds from maturities and calls of investment        533,102         173,276
securities available for sale
Net change in loans .............................    (7,668,779)     (8,891,675)
Purchases of premises and equipment .............      (647,348)       (873,942)
                                                   ------------    ------------
Net Cash used by investing activities ...........    (8,283,025)     (9,592,341)

Cash flows from financing activities:
Net change in deposits ..........................    12,253,981       9,695,707
Proceeds from exercise of stock warrants ........             0         277,300
Purchase of treasury stock ......................      (518,716)              0
                                                   ------------    ------------
Net Cash provided by financing activities .......    11,735,265       9,973,007

Net change in cash and cash equivalents .........     3,539,663         (33,820)
Beginning cash and cash equivalents .............     5,832,924       6,383,874
                                                   ------------    ------------
Ending cash and cash equivalents ................  $  9,372,587    $  6,350,054

Noncash investing activities:
Change in accumulated other comprehensive
income, net of tax ..............................  $      1,093    $     (3,321)
Transfer of loans to other real estate ..........  $    100,112    $  1,071,097

Supplemental disclosure of cash flow information:
Interest Paid ...................................  $  2,955,138    $  2,648,580
Income Taxes Paid ...............................  $    160,000    $    325,000

                 See notes to consolidated financial statements



<PAGE>


                         FIRST CHEROKEE BANCSHARES, INC
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               September 30, 1998

NOTE (1) - BASIS OF PRESENTATION

The  consolidated  financial  statements  include the accounts of First Cherokee
Bancshares, Inc. (the "Company") and its wholly-owned subsidiary, First National
Bank of Cherokee (the "Bank").  All significant accounts have been eliminated in
consolidation.  Certain prior period amounts have been  reclassified  to conform
with current year presentation.

The accompanying unaudited interim consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the Company's  financial  position as of September 30, 1998,  and the results of
its operations and its cash flows for the nine-month period then ended. All such
adjustments  are  normal  and  recurring  in nature.  The  financial  statements
included herein should be read in conjunction  with the  consolidated  financial
statements  and the notes  thereto  and the  report of  independent  accountants
included in the Company's 1997 Annual Report on Form 10-KSB.

NOTE (2) - NET EARNINGS PER SHARE

Basic  earnings  per  share is based on the  weighted  average  number of common
shares  outstanding  during the period  while the  effects of  potential  common
shares outstanding during the period are included in diluted earnings per share.
The average market price during the year is used to compute  equivalent  shares.
All net  earnings  per  share  amounts  have been  restated  to  conform  to the
provisions of SFAS No. 128.

Reconciliation  of the amounts used in the  computation of both "basic  earnings
per share" and "diluted  earnings per share" for the periods ended September 30,
1998 and 1997 are as follows:

                  For the nine months ended September 30, 1998:

                              Net Earnings       Common Shares       Per Share
                              (Numerator)        (Denominator)          Amount
                              ------------       -------------       ---------
Basic earnings per share ....   $560,805            572,103           $   0.98
Effect of dilutive securities
Stock options ...............                        10,333
Warrants ....................                        80,851
                                --------           --------              -----
Diluted earnings per share ..   $560,805            663,287           $   0.85
                                ========           ========              =====

                  For the nine months ended September 30, 1997:

                              Net Earnings       Common Shares       Per Share
                              (Numerator)        (Denominator)          Amount
                              ------------       -------------       ---------
Basic earnings per share ....   $108,485            579,857           $   0.19
Effect of dilutive securities
Stock options ...............                         9,680
Warrants ....................                        69,790
                                --------           --------              -----
Diluted earnings per share ..   $108,485            659,327           $   0.16
                                ========           ========              =====

<PAGE>
                 For the three months ended September 30, 1998:

                              Net Earnings       Common Shares       Per Share
                              (Numerator)        (Denominator)          Amount
                              ------------       -------------       ---------
Basic earnings per share ....   $117,876            562,358           $   0.21
Effect of dilutive securities
Stock options ...............                        13,353
Warrants ....................                        83,130
                                --------           --------              -----
Diluted earnings per share ..   $117,876            658,841           $   0.18
                                ========           ========              =====

                  For the three months ended September 30, 1997:

                              Net Earnings       Common Shares       Per Share
                              (Numerator)        (Denominator)          Amount
                              ------------       -------------       ---------
Basic earnings per share ....  ($319,004)           582,304             ($0.55)
Effect of dilutive securities
Stock options ...............                             *
Warrants ....................                             *
                                --------           --------              -----
Diluted earnings per share ..  ($319,004)           582,304             ($0.55)
                                ========           ========              =====

* The effect of conversion of options and warrants  would have an  anti-dilutive
effect on earnings per share.
                       


NOTE (3) - RECENT ACCOUNTING PRONOUNCEMENTS

On January 1, 1998,  the  Company  adopted  Statement  of  Financial  Accounting
Standard No. 130, "Reporting  Comprehensive  Income". This Statement establishes
standards  for  the  reporting  and  display  of  comprehensive  income  and its
components in the financial  statements.  Comprehensive income is defined as the
change in equity of a business  enterprise during a period from transactions and
other  events  and  circumstances  from  nonowner  sources.   For  the  Company,
comprehensive  income includes net income reported in the statements of earnings
and changes in the fair value of  securities  available  for sale  reported as a
component of stockholders' equity.

In February 1998, the Financial  Accounting Standards Board issued Statement No.
132, "Employer's Disclosures about Pensions and Other Postretirement  Benefits".
The new  statement  revises  employers'  disclosures  about  pension  and  other
postretirement  benefit plans but does not change the measurement or recognition
provisions of those plans.  Statement No. 132 provides additional information to
facilitate  financial analysis and eliminates  certain  disclosures which are no
longer  useful.  The  statement is effective  for fiscal years  beginning  after
December 15, 1997.  The  statement is not expected to have a material  impact on
the consolidated financial statements of the Company.

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
"Accounting   for  Derivative   Instruments  and  Hedging   Activities,"   which
standardizes  the accounting  for  derivative  instruments by requiring that all
derivatives be recognized as assets and  liabilities and measured at fair value.
This statement is effective for fiscal years  beginning after June 15, 1999. The
Company  does not believe the  provisions  of SFAS No.133 will have an impact on
the consolidated financial statements upon adoption.


<PAGE>



ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

FORWARD LOOKING STATEMENTS

Certain  statements  contained in this  Quarterly  Report on Form 10-QSB and the
exhibits   hereto  which  are  not  statements  of  historical  fact  constitute
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation  Reform Act (the "Act").  In addition,  certain  statements in future
filings by the Company with the  Securities  and Exchange  Commission,  in press
releases, and in oral and written statements made by or with the approval of the
Company which are not statements of historical fact  constitute  forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include,  but are not limited to: (1)  projections of revenues,  income or loss,
earnings or loss per share,  the payment or  non-payment  of dividends,  capital
structure and other financial  items;  (2) statements of plans and objectives of
the Company or its management or Board of Directors, including those relating to
products or services;  (3) statements of future  economic  performance;  and (4)
statements of assumptions underlying such statements.  Words such as "believes,"
"anticipates,"  "expects,"  "intends,"  "targeted," and similar  expressions are
intended to identify forward-looking  statements but are not the exclusive means
of identifying such statements.

Forward-looking  statements  involve  risks  and  uncertainties  which may cause
actual results to differ  materially from those in such  statements.  Facts that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (1) the strength of the U.S. economy
in general  and the  strength of the local  economies  in which  operations  are
conducted; (2) the effects of and changes in trade, monetary and fiscal policies
and laws,  including  interest  rate  policies of the Board of  Governors of the
Federal  Reserve  System;  (3)  inflation,  interest  rate,  market and monetary
fluctuations;  (4) the timely  development of and acceptance of new products and
services and perceived  overall  value of these  products and services by users;
(5) changes in consumer spending, borrowing and saving habits; (6) technological
changes; (7) acquisitions;  (8) the ability to increase market share and control
expenses;  (9) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking,  securities and insurance) with which the
Company and its subsidiary must comply; (10) the effect of changes in accounting
policies and practices,  as may be adopted by the regulatory agencies as well as
the  Financial  Accounting  Standards  Board;  (11)  changes  in  the  Company's
organization,  compensation  and  benefit  plans;  (12) the costs and effects of
litigation and of unexpected or adverse  outcomes in such  litigation;  and (13)
the success of the Company at managing the risks involved in the foregoing.

Such  forward-looking  statements  speak  only  as of the  date  on  which  such
statements  are made,  and the Company  undertakes  no  obligation to update any
forward-looking  statement to reflect events or circumstances  after the date on
which such statement is made to reflect the occurrence of unanticipated events.

<PAGE>

The  following  narrative  should  be read in  conjunction  with  the  Company's
consolidated financial statements and the notes thereto.

FINANCIAL CONDITION

Total  assets as of  September  30,  1998 were $98.9  million  compared to $87.6
million as of December 31, 1997. Assets of the Company  increased  approximately
$3.8  million  during the third  quarter of 1998 as  compared  to an increase of
approximately  $200,000 during the third quarter of 1997. These fluctuations are
due to normal business transactions.

Loans  increased  from $71.6  million at December  31, 1997 to $78.8  million at
September 30, 1998.  Management  anticipates  loan  production  will continue to
increase  during the remainder of the year.  The following  table presents major
classifications of loans at September 30, 1998:

                                                                                
                                                      Total % of
                                        Total            Loan
                                        Loans         Portfolio
                                        -----         ---------- 
Commercial ....................   $  7,420,362             9.25%
SBA - unguaranteed ............     21,581,518            26.90%
Real estate - mortgage ........     32,339,542            40.32%
Real estate - construction ....     13,479,794            16.80%
Installment and other consumer       5,397,138             6.73%
                                  ------------           ------
Total loans ...................     80,218,354           100.00%
                                                         ======
Less: Allowance for loan losses     (1,403,874)
                                  ------------
Total net loans ...............   $ 78,814,480
                                  ============


Net premises and  equipment  were $3.8 million at September 30, 1998 compared to
$3.4 million at December 31, 1997.  Other assets  increased from $5.5 million as
of December 31, 1997 to $6.3 million as of September 30, 1998.  The increase was
primarily  attributable to SBA guarantees of approximately  $615,000 on sold SBA
loans  pending cash receipt as of September  30, 1998 as compared to $287,000 as
of December 31, 1997. Cash is normally received within fourteen days of a sale.

Total  deposits  were $90.7  million at  September  30,  1998  compared to $78.5
million at  December  31,  1997.  As of  September  30,  1998,  interest-bearing
deposits and non interest-bearing deposits were $76.0 million and $14.7 million,
respectively.  As of  December  31,  1997,  interest-bearing  deposits  and  non
interest-bearing deposits were $66.9 million and $11.6 million, respectively.

A provision of $101,811 was added to the  allowance  for loan losses  during the
third quarter of 1998,  bringing total provisions for the year to $374,921.  The
provision is primarily attributable to the increased level of loans at September
30, 1998 compared to prior periods. The allowance had a balance of $1,403,874 at
September 30, 1998,  representing 1.75% of loans.  Chargeoffs were $72,984 while
recoveries were $11,207, resulting in net chargeoffs of $61,777 during the first
three  quarters  of  1998.  Chargeoffs  relative  to one  borrower  account  for
approximately  40% of total  chargeoffs.  Management  believes this allowance is
adequate to cover  possible  loan  losses.  The  following  table  presents  the
activity in the allowance for the first three quarters of 1998. At September 30,
1998,  the  Company  had eight  loans  (all  classified  as  nonaccrual)  to two
borrowers  requiring  total  specific  allocations  of $473,366.  The  remaining
allowance  after  any  required  specific  reserves,  less  any  surplus  in the
allowance  based on an internal  analysis,  is attributed to the loan categories
based on the relative  percentage of the particular category to total loans. Any
surplus is considered unallocated.



                         FIRST CHEROKEE BANCSHARES, INC.
                    ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

                    Balance, December 31, 1997    $ 1,090,730

                    Chargeoffs ................       (72,984)

                    Recoveries ................        11,207

                    Provision for Loan Losses .       374,921
                                                      -------
                    Balance, September 30, 1998   $ 1,403,874
                                                  ===========

<PAGE>

NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

At September 30, 1998,  the Company had sixteen loans (made to eight  borrowers)
classified as  nonaccrual  totaling  $822,465,  all of which are secured by real
estate,  vehicles,  equipment or inventory. The Company's impaired loans consist
of these  nonaccrual loans that are either greater than 90 days delinquent as of
September 30, 1998 or are  classified  as  nonaccrual by management  because the
collection  of interest  from the borrower is doubtful.  Specific  reserves have
been  identified  on those loans where  losses may occur.  Interest  income from
impaired loans is recognized using a cash basis method of accounting  during the
time within that period in which the loans were impaired.  If interest income on
the total nonaccrual loans had been accrued, such income would have approximated
$53,096 as of September 30, 1998.  Interest income on such loans,  recorded only
when received,  was approximately $220,997 for the first nine months of 1998. As
of September  30, 1998,  the Company had one property  classified  as Other Real
Estate Owned,  totaling  $510,047.  The property is currently under contract for
sale.  The ratio of loans  past due 30 days or more to total  loans was 2.66% at
September  30, 1998  compared to 4.40% at December 31, 1997.  There was one loan
totaling $515,000 past due greater than 90 days that was on accrual status as of
September  30,  1998.  The  loan  has a Small  Business  Administration  ("SBA")
guarantee  which  ensures  payment of interest  to the  Company for  uncollected
interest  from the borrower up to 120 days.  Two loans  totaling  $356,666 as of
December 31, 1997 were past due greater than 90 days and accruing. There were no
restructured loans as of September 30, 1998 or December 31, 1997.

LIQUIDITY

The  Company's  primary  sources  of  funds  are  increases  in  deposits,  loan
repayments,  and sales and maturities of  investments.  Liquidity  refers to the
ability  of the  Company  to meet  its  cash  flow  requirements  and  fund  its
commitments.  The Company manages the levels,  types,  and maturities of earning
assets in relation to the sources  available to fund current and future needs to
ensure  that  adequate  funding  will be  available  at all times.  The  Company
monitors its compliance with regulatory  liquidity  requirements and anticipates
that funding requirements will be satisfactorily met.

CAPITAL RESOURCES

At September 30, 1998, consolidated stockholders' equity was $7,107,081 or 7.18%
of total assets  compared to $7,063,899 or 8.06% of total assets at December 31,
1997. During the third quarter of 1998, the Company repurchased 11,500 shares of
treasury  stock at a price of $18.20 per share,  to provide  shares that will be
issued on exercise of warrants and stock options. The Company's common stock had
a book  value of $12.83 per share at  September  30,  1998 based on  outstanding
shares of 553,804.  The  Company's  common  stock had a book value of $12.13 per
share at December 31, 1997 based on outstanding shares of 582,304. At the end of
the third quarter of 1998, the Company had  approximately  650  stockholders  of
record.

The Bank and the Company are subject to the capital  requirements  of the Office
of the  Comptroller  of the Currency  ("OCC") and the Federal  Reserve Bank (the
"FRB"), respectively. The OCC and FRB have adopted risk-based capital guidelines
for  all  national  banks  and  bank  holding  companies,  respectively.  To  be
"adequately  capitalized," all national banks are expected to maintain a minimum
ratio of total capital  (after  deductions)  to  risk-weighted  assets of 8% (of
which at least 4% must  consist of Tier 1  Capital,  as  defined).  The Bank was
well-capitalized at September 30, 1998.

<PAGE>

The following table sets forth information with respect to the Company's capital
ratios at September  30, 1998 and 1997  compared to minimum  ratios  required by
regulation.
                                                                      To Be Well
                                                               Capitalized Under
                                             For Capital       Prompt Corrective
                              Actual       Adequacy Purposes   Action Provisions
                              ------       -----------------   -----------------
                          Amount  Ratio      Amount   Ratio       Amount   Ratio
                          ------  -----      ------   -----       ------   -----
As of September 30, 1998:

Total Capital           $8,002,508  9.93%   6,444,338  8.00%    8,055,422 10.00%
(to Risk-Weighted Assets) 
Tier 1 Capital          $6,984,437  8.67%   3,222,169  4.00%    4,833,253  6.00%
(to Risk-Weighted Assets)   
Tier 1 Capital          $6,984,437  7.24%   3,859,120  4.00%    4,823,900  5.00%
(to Average Assets) 

As of September 30, 1997:

Total Capital           $7,167,046 10.22%   5,610,177  8.00%    7,012,722 10.00%
(to Risk-Weighted Assets)   
Tier 1 Capital          $6,280,352  8.96%   2,805,089  4.00%    4,207,633  6.00%
(to Risk-Weighted Assets)   
Tier 1 Capital          $6,280,352  7.43%   3,379,149  4.00%    4,223,936  5.00%
(to Average Assets) 



RESULTS OF OPERATIONS

The Company  recognized  earnings of $560,805 for the first nine months of 1998.
In comparison, net earnings for the first nine months of 1997 were $108,485.

Net interest income for the first nine months of 1998 was $3,258,012 as compared
to  $2,710,156  for the first nine months of 1997.  The average yield on earning
assets for the first  three  quarters  of 1998  remained at 9.96% as compared to
9.96%  for the  first  three  quarters  of 1997.  The  average  cost of funds on
interest-bearing  deposits  increased  slightly for the first three  quarters of
1998 to  5.42%,  as  compared  to 5.39% for the first  three  quarters  of 1997.
Consequently,  the  net  interest  spread  for the  first  nine  months  of 1998
decreased to 4.54% compared to 4.57% for the first nine months of 1997.

Total other income for the first three quarters of 1998 was $1,843,797  compared
to $1,682,734 for the first three  quarters of 1997.  This increase is primarily
due to  increased  transaction  volume on  deposits  as well as  increased  fees
relative to the transactions.

The annualized ratio of operating  expenses to average assets decreased to 5.48%
for the first nine  months of 1998 from 5.82% for the year  ended  December  31,
1997.  Salary expense and occupancy expense have increased during 1998 primarily
due to the opening of a new branch in June 1998. The difference in other expense
is primarily attributable to the kiting loss incurred in 1997.


<PAGE>


YEAR 2000

The Company  recognizes the  operational  risk from  technology as the Year 2000
("Y2k")  approaches.  The  Company has  established  an  internal  committee  to
identify  and address how the century  change may affect its  operations.  A Y2k
Plan has been  approved  by the  Board of  Directors  detailing  the  steps  the
committee  plans to take to comply with regulatory  directives.  The Company has
developed a tracking  report  which  identifies  and monitors the areas that the
century change is expected to impact,  including the Company's  data  processor,
its computer  hardware and  software,  its telephone  system,  etc. The tracking
report also  documents  whether the area is  "mission-critical",  the individual
responsible  for confirming  compliance,  and testing  dates.  The Y2k Plan also
addresses  the  potential  risk to the Company from the impact of Y2k on Company
customers.

The Company has identified the two most mission-critical  information technology
areas to be a) the core  processing  system for  loans,  deposits,  and  general
ledger,  and b) the wide area computer  network.  The core processing system has
been  successfully  tested by proxy in May 1998 and October 1998 and directly by
the Company in August 1998.  Additionally,  regulatory  testing according to the
Federal  Financial  Institutions  Examination  Council  ("FFIEC") found the core
processor's  Y2k  efforts  to be  satisfactory  (which  is  the  highest  rating
possible).  The wide area network has been tested  successfully on two occasions
in July 1998 and August 1998 by the Company in a simulated Y2k environment.

The Company has identified the most significant non-information technology areas
to be liquidity,  customer impact including  potential loan losses,  and loss of
power,  telephone,  and  water.  While the  Company  currently  has a  liquidity
contingency  plan,  management  will  amend  the  plan  to  address  Y2k  issues
specifically  in the near future.  The Company has established a methodology for
defining Y2k risk in the loan portfolio,  including  assessing  specific risk on
each commercial customer with total debt in excess of $100,000.  Currently,  the
allowance  for loan  losses  includes a factor of  approximately  $23,000.  This
factor will be adjusted as necessary once the risk  assessment on specific loans
is completed.  Y2k risk from deposit customers has been determined to be minimal
and will be  considered  in the  liquidity  contingency  plan.  The  Company has
received  written  documentation  from its  local  power,  telephone  and  water
companies assuring successful transition to the Year 2000.

The  Company  has  identified  third-parties  with  which  it has a  significant
relationship to include its core processor and its correspondent  bank. The core
processing system has been successfully tested by both proxy and directly by the
Company.   Also,   regulatory   testing   according  to  the  Federal  Financial
Institutions  Examination  Council  ("FFIEC")  found  the core  processor's  Y2k
efforts to be satisfactory (which is the highest rating possible). The Company's
correspondent  bank reports that its  organization  expects to achieve full Year
2000 compliance by July 1999.

The Company has incurred  approximately  $40,000 in 1998 and budgeted $50,000 in
1999 for Y2k issues. Based on information  currently available,  management does
not  believe  that  the  Company  will  incur  significant  additional  costs in
connection with the Y2k issue. Nevertheless, there can be no assurances that all
hardware and software that the Company will use will be Y2k  compliant,  and the
Company  cannot  predict with any  certainty the costs the Company will incur to
respond to any Y2k issues.  Further, the business of the Company's customers and
vendors  may be  negatively  affected  by  the  Y2k  issue,  and  any  financial
difficulties  incurred  by the  Company's  customers  and vendors in solving Y2k
issues could  negatively  affect their ability to perform their  agreements with
the  Company.   Therefore,  even  if  the  Company  does  not  incur  additional
significant  direct costs in connection with responding to the Y2k issue,  there
can be no  assurance  that the  failure  or delay  of the  Company's  customers,
vendors,  or other  third  parties  in  addressing  the Y2k  issue or the  costs
involved  in such  process  will  not  have a  material  adverse  effect  on the
Company's business, financial condition and results of operations.

As a result of the  successful  completion  of the majority of Y2k testing,  the
Company believes the risk from areas under its control to be minimal.  While the
worst case scenario could include a loss of power and/or loss of  communications
with its core  processor,  the Company is reasonably  assured that this will not
occur.  The Company's  contingency  plan will address these potential issues and
will be complete by December 31, 1998.

The Company has made a business  decision to change core  processors in order to
improve  efficiencies  from  new  technology.  The  decision  to  change  is not
associated  with Y2k issues.  After  extensive  due  diligence,  the Company has
chosen a new  third-party  vendor  and is  currently  in  negotiations  with the
processor.  It is anticipated that the conversion will be complete by the end of
the first  quarter of 1999.  The new vendor has  represented  to the Company its
compliance with Y2k regulatory  requirements.  The Company will perform required
Y2k  testing on the new  system  during the  conversion  period and  immediately
thereafter and anticipates continued compliance.

<PAGE>



PART II - OTHER INFORMATION

         Item 1. Legal Proceedings

The  Bank  is a  named  Defendant  in an  Amended  and  Consolidated  Bankruptcy
Adversary Proceeding in the United States Bankruptcy Court, Northern District of
Georgia, Atlanta Division, styled as follows: Issac LeaseCo, Inc. v. L. C. Smith
Sales and Leasing, Inc., James W. Ballew, Lewis C. Smith, Ford Motor Credit, and
First National Bank of Cherokee,  USBR Northern District of Georgia Case Number:
96-6734. Issac LeaseCo, Inc. was an automobile wholesaler that did business with
a  customer  of the Bank,  L. C.  Smith  Sales and  Leasing,  Inc.  ("Sales  and
Leasing"). Among other lending to Sales and Leasing and its Principals, the Bank
had a secured  floor plan  lending  arrangement  for the  financing of Sales and
Leasing automobile inventory.  The Consolidated Adversary Proceeding claims that
Issac LeaseCo,  Inc. was defrauded by Sales and Leasing and its Principals.  The
Bank is named in the  litigation  to  establish  the  relevant  lien  rights  on
inventory supplied to Sales and Leasing through various  arrangements with Issac
LeaseCo,  Inc.  The Trustee also seeks to impose a  Bankruptcy  Code  preference
and/or State law  constructive  trust on proceeds that may have been received by
the Bank. The Bank denies any actual or  constructive  knowledge that funds used
to pay loan payments,  standard bank charges, or payments for floor plan lending
were either preference  payments or payments generated from sales of property of
the bankrupt  estate.  A tentative  settlement has been agreed to by the Trustee
and the Bank and documents  evidencing the settlement have been prepared and are
in circulation for review and comment. When the documentation is finalized,  the
agreement will be presented to the Court for approval.  The settlement will have
no material  effect on the  operations or financial  condition of the Company or
the Bank.

Apart from the  foregoing,  neither  the  Company nor the Bank is a party to any
pending legal proceedings which management believes would have a material effect
upon the operations or financial condition of the Company or the Bank.


         Item 2. Changes in Securities and Use of Proceeds - None

         Item 3. Defaults Upon Senior Securities - None

         Item 4. Submission of Matters to a Vote of Security  Holders - None

         Item 5. Other Information - None

         Item 6. Exhibits and Reports on Form 8-K

          (a)  Exhibits
          Exhibit
          Number                   Description
          3.1(1)                   Articles of Incorporation
          3.2(2)                   Bylaws, as amended through March 29, 1994
          10.1(3)(4)               Employment Agreement (Carl Hames) dated May
                                   11, 1995
          10.2(1)                  Form of Organizers' Stock Warrant Agreement
          10.3(1)                  Agreement for Lease/Purchase of Real Property
                                    for Bank Premises
          10.4(1)(3)               Form of Key Employee Stock Option Plan
          27                       Financial  Data Schedule  (for SEC use only)
                                    for quarter ended  September 30, 1998 and 
                                    September 30,1997 as amended

------------------------

         (1)      Incorporated  herein  by  reference  to  Exhibit  of the same 
                  number in the  Company's  Registration  Statement  No.
                  33-25075-A.

         (2)      Incorporated  herein by reference to Exhibit of the same 
                  number in the Company's Annual Report on Form 10-KSB for the
                  year ended December 31, 1994.

         (3)      The   indicated   exhibits   are   management   contracts   or
                  compensatory  plans or  arrangements  required  to be filed or
                  incorporated by reference herein.

         (4)      Incorporated  herein by  reference  to Exhibit of the same 
                  number in the Company's Form 10QSB for the period ended June 
                  30, 1995.

         (b)      The Company  has not filed any reports on Form 8-K during the
                  nine months ended September 30, 1998.   

         Item 7. Signatures - attached


<PAGE>



                                   SIGNATURES


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

      FIRST CHEROKEE BANCSHARES, INC.
      (Registrant)

DATE: November 12, 1998                               BY:  /s/Carl C. Hames, Jr.
      -----------------                                  ----------------------
                                                              Carl C. Hames, Jr.
                                                       President & CEO/Principal
                                                               Executive Officer

DATE: November 12, 1998                               BY:   /s/Kitty A. Kendrick
      -----------------                                   ----------------------
                                                               Kitty A. Kendrick
                                                     Principal Financial Officer