<PAGE>

                       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 June 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 June 30, 1998 was 565,304 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 June 30, 1998

                                      Index
                                      -----  
<TABLE>
<CAPTION>                                                             
                                                                      Page No.
                                                                      -------- 
<S>                                                                   <C>                           
Part I.  Financial Information

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

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

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

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

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

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

         Notes to Consolidated Financial Statements (unaudited)            8                                      

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

Part II.  Other Information

Item 1.  Legal Proceedings                                                 17   
Item 2.  Changes in Securities and Use of Proceeds                         17   
Item 3.  Defaults Upon Senior Securities                                   17   
Item 4.  Submission of Matters to a Vote of  Security Holders              17                                      
Item 5.  Other Information                                                 18   
Item 6.  Exhibits and Reports on Form 8-K                                  18   
Item 7.  Signatures                                                        20   
</TABLE>


<PAGE>
                         First Cherokee Bancshares, Inc.
                           Consolidated Balance Sheet
                                  June 30, 1998
                                   (Unaudited)
<TABLE>
<CAPTION>
                                       Assets
                                       ------
<S>                                                                  <C>
Cash & due from banks, including $4,801,005
     bearing interest                                              $  8,560,459
Federal funds sold                                                            0
                                                                   ------------
          Total cash & cash equivalents                               8,560,459
Investment securities available for sale,
     at fair value                                                      594,794
Loans, less allowance for loan losses
     of $1,325,134                                                   74,396,675
Premises and equipment, net                                           3,851,964
Accrued interest receivable and other assets                          7,752,545
                                                                      ---------
                    Total Assets                                   $ 95,156,437
                                                                   ============   

                        Liabilities and Stockholders' Equity
                        ------------------------------------ 
Liabilities:
Deposits:
     Interest-bearing deposits                                     $ 73,730,328
     Noninterest-bearing deposits                                    13,432,859
                                                                     ---------- 
          Total deposits                                             87,163,187
Accrued interest payable and other liabilities                          796,099
                                                                        -------   
                    Total Liabilities                                87,959,286

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                                                     1,724,351
Treasury Stock (26,240 shares acquired
     at cost)                                                          (393,408)
Accumulated other comprehensive
     income, net of tax                                                   1,407
                                                                          ----- 
               Total Stockholders' Equity                             7,197,151
                                                                      ---------
                    Total Liabilities and Stockholders' Equity     $ 95,156,437
                                                                   ============        
</TABLE>                                                              
                   See notes to consolidated financial statements

<PAGE>

                         First Cherokee Bancshares, Inc.
                       Consolidated Statements of Earnings
                        For the six months ended June 30,
                                   (Unaudited)
<TABLE>
<CAPTION>

Interest income:                                             1998           1997
                                                             ----           ----
<S>                                                    <C>            <C>
     Interest and fees on loans                       $ 3,912,521    $ 3,419,556
     Interest on investment securities                     24,403         27,455
     Interest on federal funds sold/overnight funds       127,329        123,215
                                                        ---------      ---------    
          Total interest income                         4,064,253      3,570,226

Interest expense on deposits                            1,910,174      1,729,637
                                                        ---------      ---------    
Net interest income                                     2,154,079      1,840,589
                                                            
Provision for loan losses                                 273,110        292,135
                                                        ---------      ---------
Net interest income after provision
     for loan losses                                    1,880,969      1,548,454
                                                        ---------      ---------
Other income:
     Gain on sale of investment securities                      0              0
     Gain on sales of loans                               761,091        755,153
     Service charges on deposit accounts
          and other income                                543,432        428,858
                                                        ---------      ---------
Total other income                                      1,304,523      1,184,011
                                                        ---------      ---------
Other expense:
     Salaries and employee benefits                     1,295,807      1,039,337
     Occupancy                                            315,050        247,515
     Other operating expense                              843,635        759,847
                                                        ---------      ---------
Total other expense                                     2,454,492      2,046,699
                                                        ---------      ---------    
Gain (Loss) on Sale of Assets                             (15,771)             0
                                                          --------       -------   
Earnings before income taxes                              715,229        685,766
                                                            
Income Tax expense                                        272,300        258,865
                                                          -------        -------  
Net earnings                                          $   442,929    $   426,901          
                                                          =======        =======  
Basic earnings per share                              $      0.77    $      0.74
                                                             ====           ====
Diluted earnings per share                            $      0.66    $      0.65
                                                             ====           ====
</TABLE>
     
                 See notes to consolidated financial statements


<PAGE>
                         First Cherokee Bancshares, Inc.
                       Consolidated Statements of Earnings
                       For the three months ended June 30,
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                            1998           1997
                                                            ----           ----
<S>                                                    <C>           <C>
Interest income:
     Interest and fees on loans                       $ 2,051,891    $ 1,800,614
     Interest on investment securities                     12,237         13,681
     Interest on federal funds sold/overnight funds        82,813         61,958
                                                      -----------    -----------
          Total interest income                         2,146,941      1,876,253

Interest expense on deposits                              974,147        878,558
                                                        ---------      ---------
Net interest income                                     1,172,794        997,695

Provision for loan losses                                 222,520        219,800
                                                        ---------      ---------
Net interest income after provision
     for loan losses                                      950,274        777,895
                                                        ---------      ---------  
Other income:
     Gain on sale of investment securities                      0              0
     Gain on sales of loans                               585,861        577,819
     Service charges on deposit accounts
          and other income                                280,243        207,544
                                                          -------        -------  
Total other income                                        866,104        785,363
                                                          -------        -------  
Other expense:
     Salaries and employee benefits                       715,474        554,326
     Occupancy                                            179,534        127,001
     Other operating expense                              472,877        436,778
                                                          -------        -------  
Total other expense                                     1,367,885      1,118,105
                                                        ---------      ---------
Gain (Loss) on Sale of Assets                             (15,771)             0
                                                          --------     ---------  
Earnings before income taxes                              432,722        445,153

Income Tax expense                                        165,500        167,750
                                                          -------        -------
Net earnings                                          $   267,222    $   277,403
                                                          =======        =======  
Basic earnings per share                              $      0.47    $      0.48
                                                             ====           ====
Diluted earnings per share                            $      0.40    $      0.42
                                                             ====           ====
</TABLE>

                 See notes to consolidated financial statements

<PAGE>
                        First Cherokee Bancshares, Inc.
                Consolidated Statements of Comprehensive Income
                       For the six months ended June 30,
                                  (Unaudited)
<TABLE>
<CAPTION>

                                                              1998        1997
                                                              ----        ----
<S>                                                       <C>          <C>     
Net earnings                                              $442,929     $426,901
Other comprehensive income, net of tax:
  Unrealized gains on securities available for sale:
    Unrealized gain (loss) arising during the period, net
      of tax of $164 and $3,637, respectively                 (269)      (5,962)
    Less: Reclassification adjustment for gains
      included in net earnings, net of tax                       0            0
                                                             -----      -------
Other comprehensive income                                    (269)      (5,962)
                                                          --------     --------   
Comprehensive income                                      $442,660     $420,939
                                                          ========     ========
</TABLE>
  
                 See Notes to Consolidated Financial Statements
<PAGE>

                         First Cherokee Bancshares, Inc.
                 Consolidated Statements of Comprehensive Income
                       For the three months ended June 30,
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                              1998        1997
                                                              ----        ----
<S>                                                        <C>        <C>
Net earnings                                               $267,222   $277,403
Other comprehensive income, net of tax:
  Unrealized gains on securities available for sale:
    Unrealized gain (loss) arising during the period, net
      of tax of $269 and $37 respectively                     (441)         61
    Less: Reclassification adjustment for gains
      included in net earnings, net of tax                       0           0
                                                              ----          --
Other comprehensive income                                    (441)         61
                                                           -------     -------    
Comprehensive income                                      $266,781    $277,464
                                                          ========    ========
</TABLE>

                 See Notes to Consolidated Financial Statements
<PAGE>
                         First Cherokee Bancshares, Inc.
                      Consolidated Statements of Cash Flows
                        For the six months ended June 30,
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                           1998            1997
                                                           ----            ----
<S>                                                    <C>             <C>
Cash flows from operating activities:
Net earnings                                           $442,929        $426,901
Adjustments to reconcile net earnings to net cash
  provided (used) in operating activities:
    Depreciation, amortization and accretion             83,142          49,549
    Provision for loan losses                           273,110         292,135
    Provision for losses on other real estate                 0          83,199
    Securities gains                                          0               0
    Change in accrued interest payable and
      other liabilities                              (1,265,522)        213,215
    Change in accrued interest receivable and
      other assets                                   (1,462,346)     (2,076,900)
                                                     -----------     -----------  
        Total adjustments                            (2,371,616)     (1,438,802)
                                                     -----------     -----------  
        Net Cash used by operating activities        (1,928,687)     (1,011,901)

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    523,385         163,784
      securities available for sale
    Net change in loans                              (3,149,163)     (4,522,130)
    Purchases of premises and equipment                (587,947)       (503,837)
                                                     -----------     -----------       
        Net Cash used by investing activities        (3,713,725)     (4,862,183)

Cash flows from financing activities:
    Net change in deposits                            8,679,355       8,836,630
    Proceeds from exercise of stock warrants                  0         277,300
    Purchase of treasury stock                         (309,408)              0
                                                      ----------      --------- 
        Net Cash provided by financing activities     8,369,947       9,113,930

Net change in cash and cash equivalents               2,727,535       3,239,846
Beginning cash and cash equivalents                   5,832,924       6,383,874
                                                      ---------       --------- 
Ending cash and cash equivalents                     $8,560,459      $9,623,720
                                                       
Noncash investing activities:
    Change in accumulated other comprehensive
         income, net of tax                               ($269)        ($5,962)
    Transfer of loans to other real estate             $100,112        $805,423

Supplemental disclosure of cash flow information:
    Interest Paid                                    $1,915,899      $1,733,552
    Income Taxes Paid                                        $0        $165,000
</TABLE>

                 See notes to consolidated financial statements

<PAGE>

                         FIRST CHEROKEE BANCSHARES, INC
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                  June 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 June 30, 1998,  and the results of its
operations  and its cash flows for the  six-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 June 30, 1998
and 1997 are as follows:

<PAGE>
For the six months ended June 30, 1998:
---------------------------------------
                                Net Earnings     Common Shares      Per Share
                                (Numerator)      (Denominator)       Amount
                                ------------     -------------      ---------
Basic earnings per share            $442,929         577,055           $0.77
Effect of dilutive securities
       Stock options                                   9,357
       Warrants                                       80,916
                                    --------         -------           -----
Diluted earnings per share          $442,929         667,328           $0.66
                                    ========         =======           =====    

For the six months ended June 30, 1997:
---------------------------------------
                                Net Earnings     Common Shares      Per Share
                                (Numerator)      (Denominator)       Amount
                                ------------     -------------      ---------   
Basic earnings per share            $427,489          578,613          $0.74
Effect of dilutive securities
       Stock options                                    9,278
       Warrants                                        68,483
                                    --------          -------          -----
Diluted earnings per share          $427,489          656,374          $0.65
                                    ========          =======          =====
--------------------------------------------------------------------------------

For the three months ended June 30, 1998:
-----------------------------------------
                                Net Earnings     Common Shares      Per Share
                                (Numerator)      (Denominator)       Amount
                                ------------     -------------      ---------
Basic earnings per share            $267,222         571,864           $0.47
Effect of dilutive securities
       Stock options                                  12,263
       Warrants                                       80,916
                                    --------         -------           -----
Diluted earnings per share          $267,222         665,043           $0.40
                                    ========         =======           =====    

For the three months ended June 30, 1997:
---------------------------------------
                                Net Earnings     Common Shares      Per Share
                                (Numerator)      (Denominator)       Amount
                                ------------     -------------      ---------   
Basic earnings per share            $277,403          582,304          $0.48
Effect of dilutive securities
       Stock options                                    9,998
       Warrants                                        70,131
                                    --------          -------          -----
Diluted earnings per share          $277,403          662,433          $0.42
                                    ========          =======          =====
  
<PAGE>
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.




<PAGE>



ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 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 June 30, 1998 were $95.2 million compared to $87.6 million as
of December 31, 1997. Assets of the Company increased approximately $4.8 million
during the second  quarter of 1998 as compared  to an increase of  approximately
$2.1 million during the second quarter of 1997.  These  fluctuations  are due to
normal business transactions.

Loans increased from $65.2 million at June 30, 1997 to $71.6 million at December
31,  1997 and  $74.4  million  at June 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 June 30, 1998:
<TABLE>
<CAPTION>

                                                                 % of
                                                                 Total
                                            Total                 Loan
                                            Loans              Portfolio
                                            -----              ---------
<S>                                       <C>                  <C>
         Commercial                       $7,536,449               9.95%
         SBA - unguaranteed               22,180,228              29.29%
         Real estate - mortgage           29,022,455              38.33%
         Real estate - construction       12,197,512              16.11%
         Installment and other consumer    4,785,165               6.32%
                                          ----------            -------
           Total loans                    75,721,809             100.00%
                                          ----------            =======
         Less: Allowance for loan losses  (1,325,134)
                                          ----------                                           
           Total net loans               $74,396,675
                                         =========== 
</TABLE>

Net premises and  equipment  were $3.8 million at June 30, 1998 compared to $3.4
million at December 31, 1997.  Other  assets  increased  from $5.5 million as of
December  31,  1997 to $7.7  million  as of June  30,  1998.  The  increase  was
primarily  attributable to SBA guarantees of approximately  $1.8 million on sold
SBA loans pending cash receipt as of June 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 $87.2 million at June 30, 1998 compared to $78.5 million at
December  31,  1997.  As of June 30,  1998,  interest-bearing  deposits  and non
interest-bearing deposits were $73.7 million and $13.4 million, respectively. As
of  December  31,  1997,  interest-bearing  deposits  and  non  interest-bearing
deposits were $66.8 million and $11.7 million respectively.

A provision of $222,520 was added to the  allowance  for loan losses  during the
second quarter of 1998, bringing total provisions for the year to $273,110.  The
provision is primarily  attributable to the increased level of loans at June 30,
1998  compared to prior  periods.  The  allowance had a balance of $1,325,134 at
June 30,  1998,  representing  1.75% of loans.  Chargeoffs  were  $47,152  while

<PAGE>

recoveries were $8,446,  resulting in net chargeoffs of $38,706 during the first
half of 1998.  Chargeoffs relative to one borrower account for approximately 70%
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 two quarters of 1998.  At June 30, 1998,  the Company had no loans
requiring a specific  allocation.  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.

<TABLE>
<CAPTION>


                         FIRST CHEROKEE BANCSHARES, INC.
                    ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
        <S>                                                    <C>
        Balance, December 31, 1997                             $1,090,730

        Chargeoffs                                                (47,152)

        Recoveries                                                  8,446

        Provision for Loan Losses                                 273,110
                                                               ----------  
        Balance, June 30, 1998                                 $1,325,134
                                                               ==========

</TABLE>


NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
-------------------------------------------

At June 30,  1998,  the  Company had  sixteen  loans  (made to eight  borrowers)
classified as  nonaccrual  totaling  $795,824,  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
June  30,  1998 or are  classified  as  nonaccrual  by  management  because  the
collection  of interest  from the  borrower  is  doubtful.  No material  loss is
anticipated  on the nonaccrual  loans so no specific  reserves or writedowns are
considered  necessary  at this time.  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  $23,419
as of June 30, 1998. Interest income on such loans, recorded only when received,
was  approximately  $90,732 for the first half of 1998. As of June 30, 1998, the
Company  had two  properties  classified  as Other Real Estate  Owned,  totaling
$685,121.  Both  properties are currently  under contract for sale. The ratio of
loans  past  due 30 days or more to total  loans  was  1.12%  at June  30,  1998
compared to 4.40% at December 31, 1997.  There was one loan totaling $9,208 past
due greater than 90 days that was on accrual status as of June 30, 1998 compared
to  two  loans  totaling  $356,666  as of  December  31,  1997.  There  were  no
restructured loans as of June 30, 1998 or December 31, 1997.


<PAGE>



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 June 30, 1998,  consolidated  stockholders' equity was $7,197,151 or 7.56% of
total  assets  compared to  $7,063,899  or 8.06% of total assets at December 31,
1997. During the second quarter of 1998, the Company  repurchased  17,000 shares
of treasury  stock at a price of $18.20 per share,  to provide shares which will
be issued on exercise of warrants and stock options.  The Company's common stock
had a book  value of $12.73  per  share at June 30,  1998  based on  outstanding
shares of 565,304.  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 second 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 following table sets forth information with respect to the Company's capital
ratios  at June  30,  1998 and 1997  compared  to  minimum  ratios  required  by
regulation.

<TABLE>
<CAPTION>


                                                               For Capital
                                        Actual              Adequacy Purposes
                                 --------------------    ----------------------
                                  Amount       Ratio       Amount       Ratio
                                  ------       -----       ------       -----
<S>                             <C>           <C>        <C>            <C>
As of June 30, 1998
-------------------
  Total Capital
  (to Risk-Weighted Assets)     $7,630,791     10.07%     6,060,480      8.00%
  Tier 1 Capital
  (to Risk-Weighted Assets)     $6,682,777      8.82%     3,030,240      4.00%
  Tier 1 Capital
  (to Average Assets)           $6,682,777      7.26%     3,681,480      4.00%

As of June 30, 1997
-------------------
  Total Capital
  (to Risk-Weighted Assets)     $7,461,039     10.99%     5,429,600      8.00%
  Tier 1 Capital
  (to Risk-Weighted Assets)     $6,615,344      9.75%     2,714,800      4.00%
  Tier 1 Capital
  (to Average Assets)           $6,615,344      8.09%     3,271,520      4.00%
</TABLE>


RESULTS OF OPERATIONS
---------------------

The Company recognized earnings of $442,929 for the first six months of 1998. In
comparison,  net  earnings  for the  first six  months  of 1997  were  $426,901.
Earnings  for the first  half of 1998 were  approximately  $62,000  or 16% above
projections.

Net interest  income for the first six months of 1998 was $2,154,079 as compared
to  $1,840,589  for the first six months of 1997.  The average  yield on earning
assets for the first half of 1998  increased to 10.50% as compared to 10.06% for
the first half of 1997. The  improvement  was primarily due to the collection of
previously  nonaccrued  interest.  The average cost of funds on interest-bearing
deposits decreased for the first half of 1998 to 5.41%, as compared to 5.44% for
the first half of 1997.  The  improvement  was  primarily a result of the Bank's
on-going effort to restructure  the deposit base from higher rate  institutional
certificates of deposit to core deposits.  Consequently, the net interest spread
for the first six months of 1998  increased  to 5.09%  compared to 4.62% for the
first six months of 1997.  The net interest  spread is expected to remain stable
for the remainder of the year.

Total other income for the first two quarters of 1998 was $1,304,523 compared to
$1,184,011 for the first two 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 5.39%
for the first six  months of 1998 from  5.82% for the year  ended  December  31,
1997. The improvement is primarily due to the increase in average assets.


<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 Bank'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 and testing dates. The Y2k Plan also addresses the potential risk to
the Bank from the impact of Y2k on Bank  customers.  The Bank's  analysis of its
Allowance for Loan and Lease losses includes a factor addressing the possibility
of loan losses due to the century  change.  In  addition,  the Bank has budgeted
$50,000 in 1998 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.



<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.   The  Bank's  Counsel   continues  to  investigate  the
circumstance  underlying  the  litigation,  including  the  application  of bond
coverage,  and is  unable at this  stage to assess  the  likely  outcome  of the
proceedings.

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  
     (a) An Annual Shareholders Meeting was held on April 22, 1998.
     (b) All of the twelve  incumbent  directors  were elected to serve one-year
terms until the annual  meeting of  shareholders  in 1999.  Additionally,  R. O.
Kononen,  Jr. was also elected to serve a one year term until the annual meeting
of shareholders in 1999. The following table sets forth the number of votes cast
for  and  withheld  with  respect  to each  nominated  Director.  There  were no
abstentions or broker non-votes.


<PAGE>


         Name of Nominee            Votes for               Votes Withheld
         ---------------            ---------               --------------
         Alan D. Bobo                308,107                       41,050
         Elwin K. Bobo               308,107                       41,050
         Michael A. Edwards          308,107                       41,050
         J. Stanley Fitts            308,107                       41,050
         Russell L. Flynn            308,107                       41,050
         Carl C. Hames, Jr.          308,107                       41,050
         C. Garry Haygood            308,107                       41,050
         Thomas D. Hopkins           308,107                       41,050
         Bobby R. Hubbard            308,107                       41,050
         R. O. Kononen, Jr.          308,107                       41,050
         Dennis M. Lord              308,107                       41,050
         Larry R. Lusk               308,107                       41,050
         Dr. Stuart R. Tasman        308,107                       41,050

         Pursuant to Rule 14a-4(c)(1)  promulgated under the Securities Exchange
Act of 1934,  as  amended,  shareholders  desiring  to  present a  proposal  for
consideration  at the Company's 1999 Annual Meeting of Shareholders  must notify
the Company in writing at its  principal  office at 9860 Highway 92,  Woodstock,
Ga.  30188,  of the contents of such  proposal no later than  February 10, 1999.
Failure to timely  submit such a proposal  will enable the proxies  appointed by
management to exercise their discretionary voting authority when the proposal is
raised at the Annual  Meeting of  Shareholders  without  any  discussion  of the
matter in the proxy statement.

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 June 30, 1998 and 
                                   June 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 six
months ended June 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: August 12, 1998                               BY:  /s/Carl C. Hames, Jr.
      ---------------                                   ----------------------
                                                            Carl C. Hames, Jr.  
                                                     President & CEO/Principal
                                                             Executive Officer

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