United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                               -------------------
                                    FORM 10-K
                                  ANNUAL REPORT
                               -------------------
     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


    For the Fiscal Year Ended December 31, 2003 Commission File No. 000-21383

                          APPALACHIAN BANCSHARES, INC.
             (Exact Name of Registrant as Specified in Its Charter)

          Georgia                                       58-2242407
  ---------------------                    -----------------------------------
 (State of Incorporation)                (I.R.S. Employer Identification Number)


                            829 Industrial Boulevard
                             Ellijay, Georgia 30540
              --------------------------------- -----------------
              (Address of Principal Executive Offices) (Zip Code)
                                 (706) 276-8000
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

Title of Each Class                    Name of Each Exchange on Which Registered
-------------------                    -----------------------------------------
     None                                             None

         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $0.01 par value
                                (Title of Class)

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

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2): Yes        No   X
                                         -----     -----

There is no established  trading market for the registrant's  capital stock. The
aggregate market value of the stock held by  non-affiliates of the registrant at
June 30, 2003 was  $41,071,200,  based on a per share price of $15, which is the
price of the last  trade of which  management  is aware on or before  such date.
Although  directors and executive  officers of the registrant were assumed to be
"affiliates"   of  the  registrant  for  purposes  of  this   calculation,   the
classification is not to be interpreted as an admission of such status.

At March 19, 2004, there were 3,697,359 shares of the registrant's  Common Stock
outstanding.


Documents Incorporated by Reference

Portions of the  registrant's  definitive  Proxy  Statement  for the 2004 Annual
Meeting of  Shareholders  are  incorporated  by reference  into Part III of this
report.


<PAGE>





                                                 APPALACHIAN BANCSHARES, INC.

                                                 2003 Form 10-K Annual Report


                                                      TABLE OF CONTENTS



<TABLE>
<CAPTION>
    Item Number                                                                                         Page or
   in Form 10-K                                          Description                                    Location
----------------      ---------------------------------------------------------------------------       --------

   PART I

<S>     <C>                                                                                                  <C>
   Item 1.            Business...................................................................            2

   Item 2.            Properties.................................................................            8

   Item 3.            Legal Proceedings..........................................................            9

   Item 4.            Submission of Matters to a Vote of Security Holders........................            9

   PART II

   Item 5.            Market for the Registrant's Common Equity and Related
                      Stockholder Matters........................................................            9

   Item 6.            Selected Financial Data....................................................           12

   Item 7.            Management's Discussion and Analysis of Financial
                      Condition and Results of Operations........................................           13

   Item 7A.           Quantitative and Qualitative Disclosures About Market Risk.................           35

   Item 8.            Financial Statements and Supplementary Data................................           35

   Item 9.            Changes in and Disagreements with Accountants on Accounting
                      and Financial Disclosure...................................................           70

   Item 9A.           Controls and Procedures....................................................           70

PART III

   Item 10.           Directors and Executive Officers of the Registrant.........................           70

   Item 11.           Executive Compensation.....................................................           70

   Item 12.           Security Ownership of Certain Beneficial Owners and Management.............           70

   Item 13.           Certain Relationships and Related Transactions.............................           70

   Item 14.           Principal Accountant Fees and Services.....................................           70

PART IV

   Item 15.           Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........           71

Signatures

</TABLE>



                                       1
<PAGE>




                                     PART I

ITEM 1.    BUSINESS

History and Development of the Company

     Appalachian  Bancshares,  Inc. (the  "Company" or  "Registrant")  is a bank
holding  company  which  engages in  providing a full range of banking  services
through  Appalachian  Community  Bank, its  commercial  bank  subsidiary,  which
formerly was two separate  subsidiary banks,  Gilmer County Bank and Appalachian
Community Bank. During 2001, Appalachian Community Bank was merged with and into
Gilmer County Bank, to become one bank. The surviving bank,  Gilmer County Bank,
simultaneously  changed its name to Appalachian Community Bank (the "Bank"). The
merger was  consummated to facilitate  greater cost  efficiencies of operations,
centralized  management,  consistency of regulatory  compliance and to provide a
stronger  capital base from which to serve the  communities in our market areas.
The name change of Gilmer County Bank,  from Gilmer  County Bank to  Appalachian
Community Bank, was desired to more clearly depict the overall geographic region
which the Bank services.  For the immediate future,  however,  those branches of
the Bank that are located in Gilmer  County will  continue to operate  under the
trade name of "Gilmer County Bank."

     On  November  30,  1998,  the Company  completed  an  acquisition  of First
National Bank of Union County ("First  National") from Century South Banks, Inc.
("Century South").  First National,  renamed as "Appalachian  Community Bank" in
1999,  was a state  chartered  bank,  organized  in 1981,  with its main banking
office located in Blairsville, Georgia. Pursuant to the terms of the acquisition
agreement,  the Company acquired First National,  in a cash  transaction,  for a
purchase  price  of $6.1  million,  with  the  assumption  of  certain  existing
liabilities  and assets of First  National  by  Century  South or certain of its
affiliates. The Company funded a portion of the purchase price with the proceeds
of a private  placement  of  132,500  shares of the  Company's  common  stock to
certain  accredited  investors.  The  aggregate  gross  proceeds of that private
placement were $2.65 million. Purchasers of shares of the Company's common stock
in that  private  placement  are  entitled to certain  registration  rights with
respect to such  shares and are subject to certain  call rights of the  Company.
The Company  funded the  remainder of the purchase  price through a $3.6 million
loan with The Bankers Bank.

     The Company was  incorporated  as a business  corporation in May 1996 under
the laws of the State of Georgia for the purpose of acquiring 100% of the issued
and outstanding  shares of common stock of Gilmer County Bank. In July 1996, the
Company  received  approval  from the  Federal  Reserve  Bank of Atlanta and the
Georgia  Department  of Banking and Finance (the "DBF") to become a bank holding
company.  In August  1996,  the Company and Gilmer  County Bank  entered  into a
reorganization  pursuant to which the Company  acquired 100% of the  outstanding
shares of Gilmer County Bank, and the  shareholders of Gilmer County Bank became
the shareholders of the capital stock of the Company.

     Currently,  the assets of the Company consist primarily of its ownership of
the capital stock of the Bank. The Company's  executive office is located at 829
Industrial  Boulevard,  Ellijay,  Georgia,  and  its  telephone  number  at such
location is (706) 276-8000.

Business of the Company

     The Company is  authorized to engage in any activity in which a corporation
is  permitted,  by law,  to engage,  subject  to  applicable  federal  and state
regulatory  restrictions  on the  activities  of  bank  holding  companies.  The
Company's  holding company structure  provides it with greater  flexibility than
the Bank would otherwise  have, to expand and diversify its business  activities
through newly formed subsidiaries or through acquisitions.

     While management of the Company has no present plans to engage in any other
business activities, management may, from time to time, study the feasibility of
establishing or acquiring subsidiaries to engage in other business activities to
the extent permitted by law.

The Bank

     The Bank was  organized  in 1994  under the laws of the State of Georgia to
conduct a commercial  banking business in Gilmer County,  Georgia.  The Bank was
formed  to meet  the  banking  needs  of  individuals,  small-  to  medium-sized

                                       2
<PAGE>

businesses,  and  farmers,   especially  those  engaged  in  apple  and  poultry
production.  The Bank was organized by a group of individuals from Gilmer County
and the surrounding area and commenced business from its main office location at
829 Industrial Boulevard, Ellijay, Georgia on March 3, 1995.

     The Bank conducts  business from four locations in three adjacent  counties
(Gilmer,  Fannin and Union) and has  correspondent  relationships  with  several
banks,  including The Bankers Bank,  Crescent Bank and Trust  Company,  SunTrust
Bank,  SouthTrust Bank,  National Bank of Commerce of Birmingham and the Federal
Home Loan Bank of  Atlanta.  The Bank's  deposits  are  insured  by the  Federal
Deposit  Insurance  Corporation.  The Bank's  branches  located in Gilmer County
currently operate under the trade name "Gilmer County Bank."

Banking Services and Operations

     The Bank  performs  banking  services  customary  for full service banks of
similar size and character. Such services include the receipt of demand and time
deposit  accounts,  the  extension  of  personal  and  commercial  loans and the
furnishing of personal and commercial checking accounts.  The Bank draws most of
its customer deposits,  and conducts most of its lending transactions,  from and
within a primary service area encompassing Gilmer County,  Fannin County,  Union
County,  Towns  County,  northern  Pickens  County,  western  Dawson  County and
southeastern Murray County, Georgia.

     The principal  business of the Bank is to attract and accept  deposits from
the public and to make loans and other  investments.  The  principal  sources of
funds for the Bank's loans and investments are (i) demand,  time,  savings,  and
other deposits (including negotiable order of withdrawal ("NOW") accounts), (ii)
amortization  and prepayment of loans  granted,  (iii) sales to other lenders or
institutions of loans or participation in loans, (iv) fees paid by other lenders
or  institutions  for  servicing  loans  sold by the  Bank to  such  lenders  or
institutions,  and (v) borrowings.  The principal sources of income for the Bank
are interest and fees collected on loans,  including fees received for servicing
loans sold to other lenders or  institutions  and, to a lesser extent,  interest
and dividends collected on other investments. The principal expenses of the Bank
are (a) interest paid on savings and other  deposits  (including  NOW accounts),
(b) interest  paid on  borrowings by the Bank,  (c) employee  compensation,  (d)
office expenses, and (e) other overhead expenses.

Employees

     Except for the officers of the Company,  who are also officers of the Bank,
the Company does not have any  employees.  At December 31, 2003,  the Bank had a
total of 130 employees,  108 of which were full-time employees.  The Company and
the Bank are not parties to any collective bargaining agreements with employees,
and management believes that employee relations are generally good.

Lending Activities

     General.  The  Bank  is  authorized  to make  both  secured  and  unsecured
commercial and consumer loans to  individuals,  partnerships,  corporations  and
other  entities.  The Bank's  lending  business  consists  principally of making
secured real estate loans,  including  residential  and commercial  construction
loans,  and  primary  and  secondary  mortgage  loans  for  the  acquisition  or
improvement of personal residences.  In addition,  the Bank makes consumer loans
to individuals  and commercial  loans to small and  medium-sized  businesses and
professional concerns.  Loans to the poultry industry constituted  approximately
6.9% of the Bank's total loans at December 31, 2003.

     The Bank has engaged in  secondary-market  mortgage  activities,  obtaining
commitments,  through  intermediaries,  from  secondary  mortgage  purchasers to
purchase mortgage loans originated by the Bank. Based on these commitments,  the
Bank originates  mortgage loans on terms  corresponding  to such commitments and
generates fee income to supplement  its interest  income.  No mortgage loans are
held by the Bank for resale nor are any loans held for mortgage servicing.

     Real Estate Loans.  Loans secured by real estate are the primary  component
of the Bank's loan portfolio, constituting approximately $271 million, or 81.6%,
of the  Bank's  total  loans at  December  31,  2003.  These  loans  consist  of
commercial real estate loans, construction and development loans and residential
real estate loans.

     Commercial  Loans. The Bank makes loans for commercial  purposes to various
lines of  businesses.  At December 31,  2003,  the Bank held  approximately  $32
million,  or 9.7% of the Bank's total loans, in commercial loans,  excluding for
these purposes commercial loans secured by real estate which are included in the
real estate category above.

                                       3
<PAGE>

     Consumer  Loans.  The Bank  makes a  variety  of loans to  individuals  for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards.  At December 31, 2003, the Bank held  approximately  $20.5
million in consumer loans, representing 6.2% of the Bank's total loans.

     Loan  Approval and Review.  The Bank's loan approval  policies  provide for
various  levels of  officer  lending  authority.  When the  aggregate  amount of
outstanding loans to a single borrower exceeds that individual officer's lending
authority, the loan request must be considered and approved by an officer with a
higher  lending  limit or the officers'  loan  committee.  Individual  officers'
lending  limits range from $15,000 to $500,000,  depending on seniority  and the
type of loan.  The officers'  loan  committee,  which consists of the president,
executive  vice  president  and senior vice  president,  has a lending  limit of
$1,000,000  secured and up to $100,000  unsecured.  Loans  exceeding  $1,000,000
require the approval of the majority of the directors' loan committee,  which is
made up of six of the Bank's directors.

     The  Bank  has a  continuous  loan  review  procedure,  involving  multiple
officers of the Bank, that is designed to promote early identification of credit
quality  problems.  All loan  officers  are charged with the  responsibility  of
rating their loans and reviewing those loans on a periodic basis,  the frequency
of which increases as the quality of the loan decreases. The Bank has contracted
with a specialist  for an  independent  assessment  of the loan  portfolio.  The
specialist reviews loans on a quarterly basis.

Deposits

     The Bank offers a variety of deposit  programs to individuals  and to small
to medium-sized  businesses and other  organizations at interest rates generally
consistent  with local market  conditions.  The Bank is authorized to accept and
pay interest on deposits from  individuals,  corporations,  partnerships and any
other types of legal entities,  including  fiduciaries (such as private trusts).
Qualified deposits are insured by the FDIC in an amount up to $100,000.

     The following  table sets forth the mix of depository  accounts at the Bank
as a percentage of total deposits at December 31, 2003.
<TABLE>

                                   Deposit Mix
<CAPTION>

                                                                                      December 31, 2003

<S>                                                                                                <C>
         Non-interest bearing demand..............................................                 7.15%
         Interest-bearing demand..................................................                22.74%
         Savings..................................................................                14.60%
         Time Deposits............................................................                31.86%
         Certificates of Deposit of $100,000 or more..............................                23.65%
                                                                                    -------------------
           Total..................................................................               100.00%
                                                                                    ===================
</TABLE>

     The Bank is a member of the Star ATM network of automated  teller machines,
which permits the Bank's  customers to perform certain  transactions in numerous
cities throughout  Georgia and in other states.  The Bank's charter provides for
trust  powers but only upon  application  to the DBF. To date,  the Bank has not
submitted, and has no plans to submit, such an application.

Competition and Market Area

     The banking  business is highly  competitive.  The Bank competes with other
commercial banks,  thrift  institutions,  credit unions, and money market mutual
fund  providers  operating  in Ellijay,  Georgia  (Gilmer  County),  Blue Ridge,
Georgia (Fannin County), Blairsville, Georgia (Union County) and elsewhere. Some
banks with which the Bank  competes  have  significantly  greater  resources and
higher lending limits (by virtue of their greater capitalization). Credit unions
and money market  mutual fund  providers  with which the Bank  competes may have
competitive  advantages as a result of being subject to different,  and possibly
less stringent, regulatory requirements.

     The Bank serves the areas of Gilmer County,  Fannin  County,  Union County,
Towns County,  northern  Pickens County,  western Dawson County and southeastern
Murray County,  Georgia. The Bank encounters  competition in its primary service
area and in surrounding  areas from other  commercial  banks. As of December 31,
2003,  three   non-locally-owned   banks  had  offices  in  Gilmer  County,  two
locally-owned  banks and one  non-locally-owned  bank had offices in Blairsville
(Union County), and four  non-locally-owned  banks had offices in Fannin County.
In addition,  many local  businesses and individuals  have deposits  outside the
primary service area of the Bank.

Monetary Policies

     The results of  operations  of the  Company and the Bank are  significantly
affected by the credit policies of monetary authorities,  particularly the Board
of  Governors  of the  Federal  Reserve  System  (the  "Federal  Reserve").  The
instruments  of monetary  policy  employed by the Federal  Reserve  include open
market operations in U.S.  government  securities,  changes in discount rates on
member  bank  borrowings,  and  changes in  reserve  requirements  against  bank
deposits.  In view of changing  conditions  in the  national  economy and in the
money  markets,  as  well  as the  effect  of  action  by  monetary  and  fiscal
authorities,  including the Federal  Reserve,  no  prediction  can be made as to
possible future changes in interest rates,  deposit levels,  loan demand, or the
business and earnings of the Bank.

                                       4
<PAGE>

Supervision and Regulation

     The following  discussion  is only  intended to provide brief  summaries of
significant  statutes  and  regulations  that  affect the banking  industry  and
therefore is not complete. Changes in applicable laws or regulations, and in the
policies of regulators, may have a material effect on the Company's business and
prospects.  Management  cannot  accurately  predict  the nature or extent of the
effects on the Company's business and earnings that fiscal or monetary policies,
or new federal or state laws, may have in the future.

The Company

     General.  As a bank  holding  company,  the  Company is subject to the Bank
Holding  Company Act of 1956,  which places the Company under the supervision of
the Board of  Governors  of the Federal  Reserve.  The Company  must file annual
reports  with the  Federal  Reserve  and must  provide  it with such  additional
information as it may require.  In addition,  the Federal  Reserve  periodically
examines the Company and the Bank.

     Bank Holding Company Regulation.  In general,  the Bank Holding Company Act
limits bank holding company business to owning or controlling banks and engaging
in other  banking-related  activities.  Bank holding  companies  must obtain the
Federal Reserve Board's approval before they:

     o    acquire  direct or indirect  ownership or control of any voting shares
          of any bank that results in total  ownership  or control,  directly or
          indirectly, of more than 5% of the voting shares of such bank;

     o    merge or consolidate with another bank holding  company;  or

     o    acquire substantially all of the assets of any additional banks.

     Subject to certain  state laws, a bank holding  company that is  adequately
capitalized  and adequately  managed may acquire the assets of both in-state and
out-of-state  banks.  Under the  Gramm-Leach-Bliley  Act of 1999, a bank holding
company meeting certain qualifications may apply to the Federal Reserve Board to
become a financial  holding  company,  and thereby engage (directly or through a
subsidiary) in certain activities deemed financial in nature, such as securities
brokerage and insurance underwriting.

     With  certain  exceptions,  the Bank  Holding  Company Act  prohibits  bank
holding  companies  from  acquiring  direct or indirect  ownership or control of
voting shares in any company that is not a bank or a bank holding company unless
the Federal  Reserve Board  determines such activities are incidental or closely
related to the business of banking.

     The  Change in Bank  Control  Act of 1978  requires  a person  (or group of
persons  acting in concert)  acquiring  "control" of a bank  holding  company to
provide the Federal  Reserve  Board with 60 days'  prior  written  notice of the
proposed  acquisition.  Following  receipt of this notice,  the Federal  Reserve
Board has 60 days (or up to 90 days if extended)  within which to issue a notice
disapproving the proposed  acquisition.  In addition,  any "company" must obtain
the Federal Reserve Board's  approval before  acquiring 25% (5% if the "company"
is a bank  holding  company)  or more of the  outstanding  shares  or  otherwise
obtaining control over the Company.

     Financial  Services  Modernization.  The laws and  regulations  that affect
banks and bank holding companies  underwent  significant  changes as a result of
the  Financial   Services   Modernization   Act  of  1999,  also  known  as  the
Gramm-Leach-Bliley   Act.  Generally,   the  act  (i)  repealed  the  historical
restrictions on preventing banks from affiliating  with securities  firms,  (ii)

                                       5
<PAGE>

provided a uniform framework for the activities of banks,  savings  institutions
and  their  holding  companies,  (iii)  broadened  the  activities  that  may be
conducted by national banks and banking  subsidiaries of bank holding companies,
(iv)  provided an enhanced  framework for  protecting  the privacy of consumers'
information  and (v)  addressed a variety of other legal and  regulatory  issues
affecting  both  day-to-day  operations  and  long-term  activities of financial
institutions.

     Bank  holding  companies  may now engage in a wider  variety  of  financial
activities  than  permitted  under  previous  law,  particularly  insurance  and
securities  activities.  In  addition,  in a change  from  previous  law, a bank
holding  company may be owned,  controlled or acquired by any company engaged in
financially related activities, so long as such company meets certain regulatory
requirements.  The act also permits  national  banks (and certain  state banks),
either  directly  or  through  operating  subsidiaries,  to  engage  in  certain
non-banking financial activities.

     Transactions  with  Affiliates.   The  Company  and  the  Bank  are  deemed
affiliates  within the  meaning of the Federal  Reserve  Act,  and  transactions
between affiliates are subject to certain restrictions.  Generally,  the Federal
Reserve  Act  limits  the  extent  to  which  a  financial  institution  or  its
subsidiaries  may engage in "covered  transactions"  with an affiliate.  It also
requires  all   transactions   with  an  affiliate,   whether  or  not  "covered
transactions,"  to be on terms  substantially the same, or at least as favorable
to the institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and other similar types of transactions.

     Tie-In  Arrangements.  The Company  and the Bank  cannot  engage in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or  furnishing  of  services.  For example,  with  certain  exceptions,
neither the Company nor the Bank may  condition an extension of credit on either
a requirement that the customer obtain additional services provided by either of
the  Company or the Bank,  or an  agreement  by the  customer  to  refrain  from
obtaining  other  services  from a  competitor.  The Federal  Reserve  Board has
adopted exceptions to its anti-tying rules that allow banks greater  flexibility
to package  products with their  affiliates.  These  exceptions were designed to
enhance  competition in banking and non-banking  products and to allow banks and
their  affiliates  to  provide  more  efficient,  lower  cost  service  to their
customers.

     State Law Restrictions.  As a Georgia business corporation, the Company may
be subject to certain  limitations and  restrictions  under  applicable  Georgia
corporate law.

The Bank

     General.  The Bank,  as a  Georgia  state-chartered  bank,  is  subject  to
regulation  and  examination  by the State of Georgia  Department of Banking and
Finance,  as well as the Federal Deposit  Insurance  Corporation.  Georgia state
laws  regulate,  among  other  things,  the scope of the  Bank's  business,  its
investments,  its  payment of  dividends  to the  Company,  its  required  legal
reserves and the nature,  lending limit,  maximum interest charged and amount of
and collateral for loans. The laws and regulations  governing the Bank generally
have been  promulgated  by  Georgia  to  protect  depositors  and not to protect
shareholders of the Company or the Bank.

     Community  Reinvestment Act. The Community  Reinvestment Act requires that,
in  connection  with  examinations  of  financial   institutions   within  their
jurisdiction,  the Federal Deposit Insurance  Corporation evaluate the record of
the  financial   institutions  in  meeting  the  credit  needs  of  their  local
communities,  including low and moderate income  neighborhoods,  consistent with
the safe and sound  operation of those banks.  These factors are also considered
in  evaluating  mergers,  acquisitions,  and  applications  to open a branch  or
facility.

     Insider Credit Transactions. Banks are also subject to certain restrictions
imposed  by the  Federal  Reserve  Act on  extensions  of  credit  to  executive
officers,  directors,  principal shareholders,  or any related interests of such
persons.  Extensions  of credit  must be made on  substantially  the same terms,
including  interest  rates  and  collateral,   and  follow  credit  underwriting
procedures  that are not less  stringent  than those  prevailing at the time for
comparable  transactions  with  persons  not  covered  above  and  who  are  not
employees. Also, such extensions of credit must not involve more than the normal
risk of repayment or present other unfavorable features.

     Federal Deposit  Insurance  Corporation  Improvement Act. Under the Federal
Deposit  Insurance  Corporation  Improvement  Act of 1991,  each federal banking
agency has prescribed, by regulation,  noncapital safety and soundness standards
for institutions  under its authority.  These standards cover internal controls,

                                       6
<PAGE>

information  systems,  and internal audit systems,  loan  documentation,  credit
underwriting,  interest  rate  exposure,  asset growth,  compensation,  fees and
benefits,  such  other  operational  and  managerial  standards  as  the  agency
determines to be  appropriate,  and standards  for asset  quality,  earnings and
stock valuation. Management believes that the Bank meets all such standards.

     Interstate  Banking and Branching.  The Riegle-Neal  Interstate Banking and
Branching  Efficiency  Act of 1994  permits  nationwide  interstate  banking and
branching under certain  circumstances.  This legislation  generally  authorizes
interstate branching and relaxes federal law restrictions on interstate banking.
Currently,  bank holding  companies may purchase banks in any state,  and states
may not prohibit such purchases. Additionally, banks are permitted to merge with
banks in other  states as long as the home  state of  neither  merging  bank has
"opted out." The  Interstate  Act requires  regulators to consult with community
organizations before permitting an interstate institution to close a branch in a
low-income area. Under recent Federal Deposit Insurance Corporation regulations,
banks are prohibited from using their interstate  branches primarily for deposit
production.   The  Federal   Deposit   Insurance   Corporation  has  accordingly
implemented  a  loan-to-deposit  ratio  screen  to ensure  compliance  with this
prohibition.

     Georgia has "opted in" to the Interstate  Act and allows  in-state banks to
merge with  out-of-state  banks  subject to certain  requirements.  Georgia  law
generally authorizes the acquisition of an in-state bank by an out-of-state bank
by merger with a Georgia financial institution that has been in existence for at
least  3  years  prior  to the  acquisition.  With  regard  to  interstate  bank
branching,  out-of-state  banks that do not already  operate a branch in Georgia
may not establish de novo branches in Georgia.

     Deposit  Insurance.  The  deposits of the Bank are  currently  insured to a
maximum of $100,000 per  depositor  through a fund  administered  by the Federal
Deposit Insurance Corporation. All insured banks are required to pay semi-annual
deposit  insurance   premium   assessments  to  the  Federal  Deposit  Insurance
Corporation.

Capital Adequacy

     Federal bank  regulatory  agencies use capital  adequacy  guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below  minimum  guideline  levels,  the  holding  company  or bank may be denied
approval to acquire or establish  additional  banks or nonbank  businesses or to
open new facilities.

     The FDIC and Federal  Reserve use risk-based  capital  guidelines for banks
and bank holding companies. These are designed to make such capital requirements
more  sensitive to  differences  in risk  profiles  among banks and bank holding
companies,   to  account  for   off-balance   sheet  exposure  and  to  minimize
disincentives for holding liquid assets.  Assets and off-balance sheet items are
assigned to broad risk categories,  each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total  risk-weighted  assets
and  off-balance  sheet items.  The  guidelines  are  minimums,  and the Federal
Reserve  has  noted  that  bank  holding  companies  contemplating   significant
expansion  programs  should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and  federally-regulated  banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1  capital.  Tier 1 capital  for bank  holding  companies  includes  common
shareholders' equity,  certain qualifying perpetual preferred stock and minority
interests in equity  accounts of  consolidated  subsidiaries,  less  intangibles
except as described above.

     The FDIC and Federal Reserve also employ a leverage ratio,  which is Tier 1
capital  as a  percentage  of total  assets  less  intangibles,  to be used as a
supplement to  risk-based  guidelines.  The principal  objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company or bank
may leverage its equity capital base. A minimum leverage ratio of 3% is required
for the most highly rated bank holding  companies and banks.  Other bank holding
companies,  banks and bank holding  companies  seeking to expand,  however,  are
required to maintain minimum leverage ratios of at least 4% to 5%.

     The  Federal  Deposit  Insurance  Corporation  Improvement  Act  created  a
statutory  framework of supervisory  actions indexed to the capital level of the
individual  institution.  Under  regulations  adopted  by  the  Federal  Deposit
Insurance Corporation and the Federal Reserve, an institution is assigned to one
of five capital categories depending on its total risk-based capital ratio, Tier
1 risk-based capital ratio, and leverage ratio, together with certain subjective
factors. Institutions which are deemed to be "undercapitalized" depending on the
category to which they are assigned are subject to certain mandatory supervisory
corrective actions.

                                       7
<PAGE>

Recent Significant Changes in Banking Laws and Regulations

     International Money Laundering  Abatement and Anti-Terrorist  Financing Act
of 2001. On October 26, 2001,  the USA PATRIOT Act was enacted.  It includes the
International  Money Laundering  Abatement and  Anti-Terrorist  Financing Act of
2001 and  strong  measures  to  prevent,  detect  and  prosecute  terrorism  and
international  money laundering.  As required by the IMLAFA, the federal banking
agencies,  in cooperation with the U.S. Treasury  Department,  established rules
that generally apply to insured  depository  institutions and U.S.  branches and
agencies of foreign banks.

     Among other  things,  the new rules  require  that  financial  institutions
implement reasonable procedures to (1) verify the identity of any person opening
an account;  (2) maintain records of the information used to verify the person's
identity;  and (3) determine  whether the person appears on any list of known or
suspected terrorists or terrorist  organizations.  The rules also prohibit banks
from  establishing  correspondent  accounts  with  foreign  shell  banks with no
physical presence and encourage cooperation among financial institutions,  their
regulators  and law  enforcement  to share  information  regarding  individuals,
entities  and  organizations  engaged  in  terrorist  acts or  money  laundering
activities.  The  rules  also  limit a  financial  institution's  liability  for
submitting  a report of  suspicious  activity and for  voluntarily  disclosing a
possible violation of law to law enforcement.

     Sarbanes-Oxley  Act of 2002. On July 30, 2002,  the  Sarbanes-Oxley  Act of
2002 was enacted to address  corporate and accounting fraud. The act established
a new accounting  oversight board that enforces auditing standards and restricts
the scope of services that accounting  firms may provide to their public company
audit clients. Among other things, it also (i) requires chief executive officers
and chief  financial  officers to certify to the  accuracy  of periodic  reports
filed with the Securities and Exchange  Commission (the "SEC"); (ii) imposes new
disclosure   requirements   regarding   internal   controls,   off-balance-sheet
transactions,  and pro forma (non-GAAP) disclosures;  (iii) accelerates the time
frame for reporting of insider  transactions and periodic disclosures by certain
public  companies;  and (iv) requires  companies to disclose whether or not they
have  adopted a code of ethics for senior  financial  officers  and  whether the
audit committee includes at least one "audit committee financial expert."

     The  Sarbanes-Oxley  Act  requires  the SEC,  based on  certain  enumerated
factors,  to regularly and  systematically  review corporate  filings.  To deter
wrongdoing,   the  act  (i)  subjects   bonuses  issued  to  top  executives  to
disgorgement  if a restatement  of a company's  financial  statements was due to
corporate  misconduct;  (ii) prohibits an officer or director from misleading or
coercing  an  auditor;  (iii)  prohibits  insider  trades  during  pension  fund
"blackout  periods";  (iv)  imposes new criminal  penalties  for fraud and other
wrongful acts; and (v) extends the period during which certain  securities fraud
lawsuits can be brought against a company or its officers.


ITEM 2.    PROPERTIES

     The Company's main office is located at 829 Industrial Boulevard,  Ellijay,
Georgia,  between the business districts of Ellijay and East Ellijay.  The 9,780
square foot building is located on approximately  1.22 acres and is owned by the
Bank. The building includes five teller stations, twenty offices, three drive-in
stations and an ATM. This location  houses the Company's and the Bank's  offices
and storage  areas.  The Bank branch at this location  operates  under the trade
name "Gilmer County Bank."

     The Bank's  branch  located on Highway  515 in  Blairsville,  Georgia has a
drive-in window, five teller stations,  eleven offices, and an ATM. The building
is owned by the Bank.  The second  floor of this  location  is vacant and may be
used by the Bank for future expansion.

     The Bank's branch  located in East Ellijay,  Georgia,  which operates under
the trade name  "Gilmer  County  Bank," has three  teller  stations,  a drive-in
window and an ATM.  The Bank has a long-term  lease for this  location  and pays
annual rent of $31,400.

     The Bank's  branch in Blue  Ridge,  Georgia  has a drive-in  window,  three
teller stations,  four offices,  and an ATM. The Bank has a 24-month lease (with
an  additiona1  24 month  renewal  option)  for the land on which this branch is
located and pays annual rent of  $32,000.  The Bank has  purchased  2.6 acres in
Blue Ridge to construct a permanent branch location. Construction has begun on a
9,000  square  foot  branch  and  a  3,500  square  foot   community   building.
Construction is expected to be completed by June 1, 2004.

                                       8
<PAGE>

     The Bank's  operations  area is  located  in a  building  owned by the Bank
located at 9 Russell Drive,  Ellijay,  Georgia.  This location houses the Bank's
computer  center,  accounting,  bookkeeping  and data  processing  services.  In
addition,  the building  includes an additional 8,000  approximate  square feet,
which is leased by the Bank to two separate  third parties for $67,200 per year.
The bank also leases a building directly behind the operations  building,  which
contains additional operations employees. The bank has a two-year lease for this
space and pays annual rent of $16,800.

     Management believes that the physical facilities  maintained by the Company
and the Bank are suitable for their current operations.


ITEM 3.    LEGAL PROCEEDINGS

     The Company is not aware of any material pending legal proceedings to which
the  Company  or the  Bank are a party or to  which  any of  their  property  is
subject,  other  than  ordinary  routine  legal  proceedings  incidental  to the
business of the Bank.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of  shareholders  of the Company during
the fourth quarter of the fiscal year covered by this report.


                                     PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS

Market Information

     There is no  established  trading  market for the  Company's  common stock,
$0.01 par value per share (the "Common Stock"), which has been traded inactively
in private transactions.  Therefore,  no reliable information is available as to
trades of the Common Stock or as to the prices at which Common Stock has traded.
In 1998,  Wachovia  Securities,  Inc.  was  approved  as a market  maker for the
Company's Common Stock.

     In July 2003,  the Company paid a ten percent  stock  dividend  (the "Stock
Dividend") to shareholders  of record as of May 27, 2003. All amounts  presented
in this Report and in the financial statements are adjusted to reflect the Stock
Dividend.  The Stock Dividend created a small decrease in  shareholders'  equity
for cash paid in lieu of fractional shares in the amount of $1,931.



              [The remainder of this page intentionally left blank]

                                       9
<PAGE>


     Management has reviewed the limited information  available as to the ranges
at which the  Common  Stock has been sold and is aware of trades  that  occurred
during 2003. To the best of management's  knowledge,  the last trade in December
2003 was  executed  at a price of $15.00  per  share.  The per share  price data
regarding the Common Stock is provided for information  purposes only and should
not be viewed as indicative of the actual or market value of the Common Stock.
<TABLE>

<CAPTION>
                                                                                            Estimated Price
                                                                                            Range Per Share
                                                                                    -------------------------------
                                                                                        High               Low
                                                                                    -------------    --------------
2003:
<S>                                                                                 <C>              <C>
   First Quarter.................................................................   $       16.00    $        15.00
   Second Quarter................................................................           15.00             15.00
   Third Quarter.................................................................           15.00             15.00
   Fourth Quarter................................................................           15.00             13.37

2002:
   First Quarter.................................................................   $       17.00    $        15.00
   Second Quarter................................................................           16.00             15.00
   Third Quarter.................................................................           15.00             15.00
   Fourth Quarter................................................................           15.00             15.00
</TABLE>

Holders

     At March 19,  2004,  the  Company  had  3,697,359  shares  of Common  Stock
outstanding held by approximately 1,408 shareholders of record.

Recent Sales of Unregistered Securities

     On December 2, 2002, the Company commenced a private placement offering, to
accredited  investors  only,  of up to  200,000  shares of Common  Stock,  at an
aggregate offering price of $3,000,000 ($15.00 per share) (the "Offering").  The
Company sold 180,687 shares of Common Stock through the Offering,  which expired
on June 30, 2003.  The Offering was made without the services of an  underwriter
and without any advertising or promotion,  and sales therein were solicited only
by certain of the  Company's  executive  officers  and  directors,  none of whom
received  any  commission  or  remuneration  for  their  efforts.  Further,  the
securities  sold  in the  Offering  were  exempt  from  registration  under  the
Securities  Act of  1933,  as  amended  (the  "Securities  Act"),  based  on the
exemption  set  forth  in  Rule  506 of  Regulation  D,  promulgated  under  the
Securities Act, which provides that  registration  is not required where,  among
other  things,  all of the  purchasers  in  such  an  offering  are  "accredited
investors,"  as that term is defined in Section  2(a)(15) of the  Securities Act
and Rule 501 of  Regulation  D.  Purchasers  of shares  of  Common  Stock in the
Offering are entitled to certain registration rights with respect to such shares
and are subject to certain call rights of the Company.

Dividends

     The Bank is subject to  restrictions  on the  payment  of  dividends  under
Georgia  law and the  regulations  of the DBF.  The  Company is also  subject to
limits on payment of dividends by the rules, regulations and policies of federal
banking  authorities.  The primary source of funds  available for the payment of
cash  dividends by the Company are  dividends  from the Bank.  There are various
statutory and regulatory limitations on the payment of dividends by the Bank, as
well as by the Company to its  shareholders.  No assurance can be given that any
dividends  will be declared by the Company in the future,  or if declared,  what
amounts would be declared or whether such dividends would continue.  The Company
has not paid any cash  dividends to date.  The Company paid a 10% stock dividend
on July 1, 2003.

                                       10
<PAGE>


Securities Authorized for Issuance Under Equity Compensation Plans

     At a prior  Annual  Meeting,  the  Company's  shareholders  adopted a Stock
Compensation  Program (the "Stock  Program").  The following  table reflects the
number of shares to be issued  upon the  exercise of options  granted  under the
Stock Program, the weighted-average  exercise price of all such options, and the
total  number of  shares of Common  Stock  reserved  for the  issuance  upon the
exercise of authorized, but not-yet-granted options, as of December 31, 2003.

<TABLE>

                                                                                                   Number of
                                                        Number of                               Equity Securities
                                                       Securities                                   Remaining
                                                      to be Issued       Weighted-average      Available for
                                                    Upon the Exercise      Exercise Price        Future Issuance
                                                     of Outstanding        of Outstanding           Under the
            Plan Category                                Options               Options            Stock Program
------------------------------------               ------------------    -----------------     -----------------

Equity Compensation Plans
<S>                                                           <C>        <C>                             <C>
   Approved by Shareholders....................               433,140    $            5.65               233,900
Equity Compensation Plans
   Not Approved by Shareholders................                    --                   --                    --
                                                   ------------------    -----------------     -----------------

   Total.......................................               433,140    $            5.65               233,900
                                                   ==================    =================     =================

</TABLE>



              [The remainder of this page intentionally left blank]

                                       11
<PAGE>


ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

     The following table sets forth selected consolidated  financial data of the
Company for the year ended December 31, 2003,  and the previous four years.  All
averages are daily averages.
<TABLE>
<CAPTION>

                                                                          Years Ended December 31,
                                                       ------------------------------------------------------------
                                                           2003         2002        2001        2000       1999
                                                       ----------    ---------   ---------   ----------  ----------
                                                           (Dollars in thousands except per share data and ratios)
Earnings Summary
<S>                                                    <C>           <C>         <C>         <C>         <C>
   Interest income..................................   $   22,996    $  22,892   $  23,890   $   21,970  $   16,139
   Interest expense.................................        8,257       11,425      13,675       13,325       9,139
   Net interest income..............................       14,739       11,467      10,215        8,645       7,000
   Provision for loan losses........................        1,465        1,028       1,294          922         880
   Noninterest income...............................        2,797        2,937       2,411        1,159         845
   Noninterest expense..............................       11,732        9,702       7,831        6,381       5,561
   Income tax expense...............................        1,253        1,006         963          872         139
   Net income.......................................        3,086        2,668       2,538        1,629       1,265

Per Share Data
(Retroactively adjusted to give effect to stock splits/dividends)
   Net income - basic...............................   $     0.86    $    0.81  $     0.81   $     0.54  $     0.44
   Net income - diluted.............................         0.81         0.76        0.75         0.50        0.40
   Cash dividends declared per common share.........         0.00         0.00        0.00         0.00        0.00

Selected Period End Balances
   Total assets.....................................      409,617      384,024     319,679      270,943     223,315
   Loans............................................      332,307      298,063     250,569      214,124     169,106
   Securities.......................................       55,363       40,375      49,394       32,541      28,536
   Earning assets...................................      388,530      354,593     303,923      253,263     207,501
   Deposits.........................................      332,919      316,283     264,028      214,169     186,730
   Long-term borrowings.............................       36,879       34,736      29,654       34,539      16,964
   Shareholders' equity.............................       31,082       25,619      20,591       17,669      12,421
   Shares outstanding...............................        3,659        3,439       3,170        3,143       1,480

Selected Average Balances
   Total assets.....................................      393,553      354,164     299,167      259,799     203,703
   Loans............................................      316,605      276,733     234,031      204,436     150,691
   Securities.......................................       49,951       50,933      40,462       34,393      33,192
   Earning assets...................................      370,654      333,777     280,884      243,038     191,540
   Deposits.........................................      320,833      290,961     241,933      206,787     175,025
   Long-term borrowings.............................       35,782       34,017      33,028       29,024      12,798
   Shareholders' equity.............................       28,447       22,454      19,821       15,045      11,950
   Shares outstanding - basic.......................        3,610        3,278       3,146        3,031       2,917

Ratios
   Return on average assets.........................         0.78%         0.75%      0.85%        0.63%       0.62%
   Return on average equity.........................        10.85         11.88      12.80        10.83       10.59
   Net interest spread..............................         3.90          3.32       3.75         3.39        3.52
   Total capital....................................        11.55          8.59       8.32         8.25        7.41
   Tier 1 capital...................................        10.46          7.54       7.16         7.22        6.34
   Leverage ratio...................................         8.58          6.07       5.87         5.72        5.22
   Average equity to average assets.................         7.23          6.34       6.63         5.79        5.87

</TABLE>
                                       12
<PAGE>


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

     The purpose of the following  discussion is to address information relating
to the financial condition and results of operations of the Company that may not
be readily apparent from a review of the consolidated  financial  statements and
notes  thereto,  included  in this  Report.  This  discussion  should be read in
conjunction with information  provided in the Company's  consolidated  financial
statements  and notes thereto.  Unless  otherwise  noted,  the discussion of net
interest  income in this financial  review is presented on a taxable  equivalent
basis to facilitate performance comparisons among various taxable and tax-exempt
assets.


                           Forward-Looking Statements

     Certain of the statements made in this Report and in documents incorporated
by reference herein, including matters discussed under the caption "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations,"  as
well as oral  statements  made by the  Company  or its  officers,  directors  or
employees,  may  constitute  forward-looking  statements  within the  meaning of
Section 21E of the  Securities  Exchange Act of 1934, as amended (the  "Exchange
Act").  Such  forward-looking  statements  are  based on  management's  beliefs,
current  expectations,  estimates and projections  about the financial  services
industry,  the economy and about the Company and the Bank.  The words  "expect,"
"anticipate,"  "intend,"  "plan,"  "believe,"  "seek,"  "estimate"  and  similar
expressions  are  intended to identify  such  forward-looking  statements.  Such
forward-looking  statements  are not  guarantees of future  performance  and are
subject  to risks,  uncertainties  and other  factors  that may cause the actual
results,  performance or achievements  of the Company to differ  materially from
historical   results  or  from  any  results   expressed   or  implied  by  such
forward-looking  statements.  Such  factors  include,  without  limitation,  (i)
increased competition with other financial institutions,  (ii) lack of sustained
growth in the  economy  in  Gilmer,  Fannin  and  Union  Counties,  (iii)  rapid
fluctuations  in  interest  rates,  (iv) the  inability  of the Bank to maintain
regulatory capital standards,  and (v) changes in the legislative and regulatory
environment.  Many of these factors are beyond the Company's  ability to control
or  predict,  and  readers  are  cautioned  not to put  undue  reliance  on such
forward-looking  statements.  The Company  disclaims any obligation to update or
revise any  forward-looking  statements  contained in this Report,  whether as a
result of new information, future events or otherwise.

Summary

     The Company's net income of $3,086,580 for the year ended December 31, 2003
represented  an  increase  of $418,572  or 15.7%.  The  Company's  net income of
$2,668,008  for the year ended  December  31,  2002,  represents  an increase of
$129,910 or 5.1%.  The  Company's  net income of  $2,538,098  for the year ended
December 31, 2001, represented an increase of $908,667 or 55.8%. The increase in
net income for these  periods  relates to  increased  loan  growth and  improved
interest rate management coupled with proper management of expenses.

     Earnings per share  increased to $0.86 ($0.81 on a diluted  basis) in 2003,
up from $0.81  ($0.76 on a diluted  basis) in 2002 and $0.81 ($0.75 on a diluted
basis) in 2001.  Return on average assets,  which reflects the Bank's ability to
utilize its assets,  was 0.78% in 2003,  compared to 0.75% in 2002, and 0.85% in
2001.  Return on average  shareholders'  equity  decreased to 10.85% in 2003 and
decreased  to 11.88% in 2002,  compared  to 12.80% in 2001.  The decline in this
ratio is due in large part to  continued  growth and  expansion  in the Company.
During 2002 and 2003,  the Company sold  180,687  shares of common stock for net
proceeds of $2,710,306 to support future  expansion.  Options  exercised in 2003
and 2002  generated  proceeds of  $529,330  and $1,021,498,  respectively.  Also
during 2002,  the Company  issued and sold 12,859  shares to its 401(k) plan for
$163,660.

     The Company plans to continue its objectives of  maintaining  asset quality
and providing superior service to its customers. The Company's strategic plan in
the short run  includes  controlled  growth with a focus on  developing  banking
relationships.  The Company plans to provide the best value in deposit  services
and loan products to its  customers.  During 2003,  the Company  placed a strong
focus on improving the net interest margin.  Pricing models were put in place to
assist loan officers with structuring loan products to fit our customers' needs,
as well as deposit pricing models to assist with funds  management.  The Company
is also taking advantage of alternative funding sources when needed. Some of the
alternative  sources  include the  national CD market,  brokered CD market,  the
Federal Home Loan Bank and repurchase agreements. The results of this effort are
beginning to show in the Company's margin and bottom line.

                                       13
<PAGE>


Critical Accounting Policies

     The Company has established  various  accounting  policies which govern the
application of generally  accepted  accounting  principles in the preparation of
the  financial  statements.  Certain  accounting  policies  involve  significant
judgments  and  assumptions  by  management  that have a material  impact on the
carrying  value of certain  assets and  liabilities.  Management  considers such
accounting  policies to be  critical  accounting  policies.  The  judgments  and
assumptions  used by  management  are based on historical  experience  and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions  made by management,  actual results
could  differ  from these  judgments  and  estimates  that could have a material
impact on the  carrying  values of assets  and  liabilities  and the  results of
operations of the Company. The Company believes the allowance for loan losses is
a critical  accounting  policy that requires the most significant  judgments and
estimate used in the preparation of the Consolidated Financial Statements. Refer
to Note 1 to the  Consolidated  Financial  Statements,  Summary  of  Significant
Accounting  Policies,  and the allowance for loan loss discussions in Note 7 and
Item 7 for a description of the estimation  processes and methodology related to
the allowance for loan losses.

Financial Condition

Earning Assets

     The Bank's earning assets,  which include deposits in other banks,  federal
funds sold,  securities and loans,  averaged  $370,654,000,  or 94.2% of average
total assets in 2003,  $333,777,000,  or 94.2% of average total assets, in 2002,
compared to $280,884,000,  or 93.9% of average total assets, in 2001. The mix of
average earning assets comprised the following percentages:
<TABLE>
<CAPTION>

                                                                                         December 31,
                                                                           ----------------------------------------
                                                                               2003          2002          2001
                                                                           -----------   -----------    -----------

<S>                                                                                <C>          <C>            <C>
Deposits in other banks................................................            0.21%        0.30%          0.14%
Federal funds sold.....................................................            0.89         1.53           2.13
Investment securities..................................................           13.48        15.26          14.41
Loans..................................................................           85.42        82.91          83.32
</TABLE>

     The mix of average earning assets reflects management's attempt to maximize
interest income while maintaining acceptable levels of risk.

     The management of the Company  considers many criteria in managing  earning
assets, including creditworthiness, diversification, maturity, and interest rate
sensitivity.  The  following  table  sets forth the  Company's  interest-earning
assets by category at December 31 in each of the last three years.
<TABLE>

<CAPTION>
                                                                                         December 31,
                                                                           ----------------------------------------
                                                                               2003          2002          2001
                                                                           -----------   -----------    -----------
                                                                                        (In thousands)

<S>                                                                        <C>           <C>            <C>
Interest-bearing deposits with banks....................................   $       274   $     8,399    $       746
Securities..............................................................        55,363        40,375         49,394
Federal funds sold......................................................           586         7,756          3,214
Loans:
   Real estate..........................................................       271,217       238,768        202,107
   Commercial and other.................................................        61,090        59,295         48,462
                                                                           -----------   -----------    -----------
     Total loans........................................................       332,307       298,063        250,569
                                                                           -----------   -----------    -----------

Interest-earning assets ................................................   $   388,530   $   354,593    $   303,923
                                                                           ===========   ===========    ===========
</TABLE>

     The Bank has intentionally  avoided the growing national market in loans to
finance  leveraged  buy-outs,  and has participated in no nationally  syndicated
leveraged  buy-out  loans.  It has also  avoided  exposure  to lesser  developed
country ("LDC") debt, and has no LDC loans in its portfolio.

Federal Funds Sold

     Management  maintains  federal  funds sold as a tool in managing the Bank's
daily cash needs. Federal funds sold at December 31, 2003 and 2002 were $586,000
and  $7,756,000,   respectively.   Average  federal  funds  sold  for  2003  was
approximately  $3,314,000,  or 0.89% of average earning assets, and for 2002 was
approximately  $5,104,000,  or 1.53% of average earning assets.  The decrease in
year-end  federal  funds  resulted  from  the  Bank's  focus  on  improving  the
net-interest  margin.  The Bank worked towards  minimizing federal funds sold in
this low rate environment to maximize its use of earning assets.

                                       14
<PAGE>

Securities Portfolio

     At December 31, 2002,  $40,374,902 of the Bank's securities were classified
as  available-for-sale,  while at December 31, 2003,  $55,363,327  of the Bank's
securities were classified as available-for-sale.

     The composition of the Bank's securities  portfolio  reflects the Company's
investment strategy of maximizing portfolio yields subject to risk and liquidity
considerations.  The primary objectives of the Company's investment strategy are
to maintain an appropriate level of liquidity,  and to provide a tool with which
to control the Bank's interest rate position while, at the same time,  producing
adequate levels of interest income.  Management of the maturity of the portfolio
is necessary to provide  liquidity  and to control  interest  rate risk.  During
2003, gross  securities  sales were $5,368,830 and maturities were  $23,121,518,
representing 10.75% and 46.29%,  respectively,  of the average portfolio for the
year. Net losses  associated with sales and maturities  totaled $16,978 in 2003.
Gross  unrealized  gains in the portfolio  amounted to $966,919 at year-end 2003
and unrealized losses amounted to $316,263. During 2002, gross sales amounted to
$12,597,325 and maturities amounted to $34,322,603, representing 24.7% and 67.4%
of the average  portfolio,  respectively.  Net gains  associated  with sales and
maturities  totaled  $285,525 in 2002.  Gross  unrealized gains in the portfolio
amounted to $698,255 at year-end 2002 and unrealized losses amounted to $17,876.

     Mortgage-backed  securities  have varying  degrees of risk of impairment of
principal,  as opposed to U.S. Treasury and U.S.  government agency obligations,
which are  considered  to  contain  virtually  no default  or  prepayment  risk.
Impairment   risk  is  primarily   associated  with   accelerated   prepayments,
particularly  with  respect  to longer  maturities  purchased  at a premium  and
interest-only   strip  securities.   The  Bank's  purchases  of  mortgage-backed
securities  during  2003,  2002 and 2001 did not include  securities  with these
characteristics. The recoverability of the Bank's investments in mortgage-backed
securities is reviewed periodically, and the Company intends to make appropriate
adjustments to income for impaired values.

     The  following  table  presents  the  carrying  amounts  of the  securities
portfolio at December 31 in each of the last three years.
<TABLE>

                                           Securities Portfolio

<CAPTION>
                                                                                      December 31,
                                                                     ----------------------------------------------
                                                                         2003             2002            2001
                                                                     -------------   -------------   --------------
                                                                                     (In thousands)

Securities Available-for-Sale:
<S>                                                                  <C>             <C>             <C>
   U.S. treasury and government agencies........................     $      20,074   $       8,579   $       14,691
   Mortgage-backed securities...................................            19,205          14,759           19,340
   State and municipal securities...............................            14,355          15,314           13,805
   Equity securities............................................             1,729           1,723            1,558
                                                                     -------------   -------------   --------------

     Total......................................................     $      55,363   $      40,375   $       49,394
                                                                     =============   =============   ==============

</TABLE>

     In 2003, average taxable  securities were 69.9% of the portfolio,  compared
to 68.2% in 2002 and 69.7% in 2001.

                                       15
<PAGE>


     The maturities and weighted  average yields of the  investments in the 2003
portfolio  of  securities  are  presented  below.  The  average  maturity of the
securities  portfolio  is 7.27  years with an  average  yield of 5.28%.  Taxable
equivalent  adjustments  (using  a 34  percent  tax  rate)  have  been  made  in
calculating yields on tax-exempt obligations.
<TABLE>

                                     Security Portfolio Maturity Schedule

<CAPTION>
                                                                       Maturing
                                    ------------------------------------------------------------------------------
                                         Within            After One But       After Five But           After
                                        One Year          Within Five Years   Within Ten Years        Ten Years
                                    -----------------    ------------------   -----------------   ----------------
                                     Amount     Yield     Amount      Yield    Amount     Yield    Amount    Yield
                                    --------    -----    --------     -----   --------    -----   --------   -----
                                                      (Amounts in thousands, except percentages)
Securities Available-for-Sale

<S>                                 <C>          <C>    <C>            <C>    <C>          <C>    <C>         <C>
   U.S. Government agencies......   $     --     0.00%  $  16,072      2.95%  $  4,002     3.30%  $     --    0.00%
   Mortgage-backed...............      7,362     2.67       7,580      3.82        537     5.34      3,726    4.90
   State and municipal...........         --     0.00         276      6.12      2,214    28.60     11,865    7.42
   Equity securities.............         --     0.00          --      0.00         --     0.00      1,729    3.50
                                    --------            ---------             --------            --------

Total Securities.................   $  7,362            $  23,928             $  6,753            $ 17,320
                                    ========            =========             ========            ========
</TABLE>

     There were no securities  held by the Company of which the aggregate  value
on December 31, 2003 exceeded ten percent of shareholders'  equity at that date.
(Securities  which are payable from and secured by the same source of revenue or
taxing authority are considered to be securities of a single issuer.  Securities
of the U.S.  Government and U.S.  Government  agencies and  corporations are not
included.)

     There  has  been  no  significant  impact  on  the  Company's  consolidated
financial  statements  as a result of the  provisions  of Statement of Financial
Accounting Standards No. 119, Disclosure about Derivative Financial  Instruments
and Fair Value of Financial Instruments.

Loan Portfolio

     Loans make up the  largest  component  of the  Bank's  earning  assets.  At
December 31, 2003, the Bank's total loans were  $332,306,446,  compared to total
loans of $298,063,055 at the end of 2002. In 2003, average net loans represented
85.4% of average earning assets and 80.4% of total average assets, while in 2002
average net loans represented 82.9% of average earning assets and 78.1% of total
average  assets.  This was the result of  continued  strong  loan demand and the
expansion of the Bank's branch in Blue Ridge,  Georgia. The ratio of total loans
to total deposits was 99.8% in 2003 and 94.2% in 2002.

     The following table shows the  classification of loans by major category at
December 31, 2003, and for each of the preceding four years.

<TABLE>
                                 Loan Portfolio

<CAPTION>
                                                             December 31,
                                  -------------------------------------------------------------------------------------------------
                                        2003                2002                2001                 2000               1999
                                  -----------------  -----------------    ------------------    ----------------   ----------------
                                            Percent            Percent               Percent             Percent            Percent
                                  Amount   of Total  Amount   of Total    Amount    of Total    Amount  of Total   Amount  of Total
                                  -------  --------  -------  --------    -------   --------    ------- --------   ------- --------
                                                                     (Dollars in thousands)


Commercial, financial
<S>                              <C>          <C>   <C>          <C>     <C>           <C>     <C>         <C>    <C>          <C>
    .and agricultural            $ 34,613     10.4% $ 33,449     11.2%   $ 29,092      11.6%   $ 36,320    17.0%  $ 35,375     20.9%
Real estate - construction        104,619     31.5    73,242     24.6      54,255      21.7      22,057    10.3     13,941      8.2
Real estate - other (1)           166,598     50.1   165,526     55.5     147,852      59.0     136,718    63.8    103,413     61.2
Consumer.........                  20,535      6.2    20,296      6.8      19,370       7.7      17,254     8.1     15,026      8.9
Other loans......                   5,942      1.8     5,550      1.9          --       0.0       1,775     0.8      1,351      0.8
                                  -------  -------   -------   ------     -------   -------     -------  ------    -------   ------
                                  332,307    100.0%  298,063    100.0%    250,569     100.0%    214,124   100.0%   169,106    100.0%
                                           =======             ======               =======              =======             ======
Allowance for loan losses          (3,610)            (3,238)              (2,995)               (2,211)            (1,849)
                                  -------            -------              -------               -------            -------

Net loans........                $328,697           $294,825             $247,574              $211,913           $167,257
                                 ========           ========              =======               =======            =======
<FN>
(1)  The "real estate - other" category includes multi-family residential,  home equity,  commercial  real estate and undeveloped
     agricultural real estate loans.
</FN>

</TABLE>

                                       16
<PAGE>


     The  following  table shows the  maturity  distribution  of  selected  loan
classifications at December 31, 2003, and an analysis of these loans maturing in
over one year.
<TABLE>

                           Selected Loan Maturity and Interest Rate Sensitivity
<CAPTION>

                                                                                        Rate Structure for Loans
                                                        Maturity                         Maturing Over One Year
                                 ---------------------------------------------------  -----------------------------
                                                Over One
                                      One         Year         Over                    Predetermined   Floating or
                                    Year or      Through       Five                      Interest      Adjustable
                                     Less      Five Years      Years        Total          Rate           Rate
                                 -----------   -----------  -----------  -----------  -------------  --------------
                                                             (Amounts in thousands)

Commercial, financial
<S>                              <C>           <C>          <C>          <C>          <C>            <C>
   and agricultural............  $    27,942   $     6,088  $       583  $    34,613  $       4,650  $        2,021
Real estate - construction.....       89,926        14,608           85      104,619         10,337           4,356
                                 -----------   -----------  -----------  -----------  -------------  --------------

   Total.......................  $   117,868   $    20,696  $       668  $   139,232  $      14,987  $        6,377
                                 ===========   ===========  ===========  ===========  =============  ==============
</TABLE>

     For the  purposes  of this  schedule,  loans  that have  reached  the fixed
contractual floor rate are treated as having a pre-determined interest rate.

Summary of Loan Loss Experience

     The provision for loan losses,  which is charged to operating  results,  is
based on the  growth  of the  loan  portfolio,  the  amount  of net loan  losses
incurred and  management's  estimation  of potential  future  losses based on an
evaluation  of the  risk in the loan  portfolio.  Management  believes  that the
$3,609,794  in the  allowance  for loan losses at December 31,  2003,  (1.09% of
total net outstanding  loans at that date) was adequate to absorb known risks in
the portfolio,  based upon the Bank's historical experience. No assurance can be
given, however, that increased loan volume, adverse economic conditions or other
circumstances will not result in increased losses in the Bank's loan portfolio.




              [The remainder of this page intentionally left blank]

                                       17
<PAGE>


     The  following  table sets forth  certain  information  with respect to the
Bank's loans, net of unearned income, and the allowance for loan losses for 2003
as well as each of the preceding four years:

<TABLE>

                                           Analysis of Loan Loss Experience

<CAPTION>
                                                                      Year ended December 31,
                                               --------------------------------------------------------------------
                                                  2003          2002           2001          2000          1999
                                               -----------   -----------   -----------   -----------    -----------
                                                               (Amounts in thousands, except ratios)



<S>                                            <C>           <C>           <C>           <C>            <C>
Allowance for loan losses at beginning of year $     3,238   $     2,995   $     2,211   $     1,849    $     1,686
Loans charged off:
   Commercial, financial, and agricultural..           277            89           240           404            461
   Real estate-construction.................            28            50            --            --             --
   Real estate - other......................           638           427           134            49             22
   Consumer.................................           265           250           170           138            278
                                               -----------   -----------   -----------   -----------    -----------
     Total loans charged off................         1,208           816           544           591            761
                                               -----------   -----------   -----------   -----------    -----------

Recoveries on loans previously charged off:
   Commercial, financial, and agricultural..            25             5             8             9             15
   Real estate-construction.................             3            --            --            --             --
   Real estate-other........................            50            --             6            --             --
   Consumer.................................            37            26            20            22             29
                                               -----------   -----------   -----------   -----------    -----------
     Total recoveries on loans previously
     charged off                                       115            31            34            31             44
                                               -----------   -----------   -----------   -----------    -----------

Net loans charged off.......................         1,093           785           510           560            717
                                               -----------   -----------   -----------   -----------    -----------

Provision for loan losses...................         1,465         1,028         1,294           922            880
                                               -----------   -----------   -----------   -----------    -----------

Allowance for loan losses, at end of period.   $     3,610   $     3,238   $     2,995   $     2,211    $     1,849
                                               ===========   ===========   ===========   ===========    ===========

Loans, net of unearned income, at end of period$   332,307   $   298,063   $   250,569   $   214,124    $   169,106
                                               ===========   ===========   ===========   ===========    ===========

Average loans, net of unearned income,
outstanding for the period..................   $   316,605   $   276,733   $   234,031   $   204,436    $   150,691
                                               ===========   ===========   ===========   ===========    ===========

Ratios:
Allowance at end of period to loans, net of
   unearned income..........................          1.09%         1.09%         1.20%         1.03%          1.09%
Allowance at end of period to average loans,
   net of unearned income...................          1.14          1.17          1.28          1.08           1.23
Net charge-offs to average loans, net of
   unearned income..........................          0.35          0.28          0.22          0.27           0.48
Net charge-offs to allowance at end of period        30.28         24.24         17.03         25.33          38.78
Recoveries to prior year charge-offs........         14.09          5.70          5.75          4.07          32.35

</TABLE>

     In  assessing  adequacy,  management  relies  predominantly  on its ongoing
review of the loan  portfolio,  which is  undertaken  both to ascertain  whether
there are  probable  losses  that  must be  charged  off and to assess  the risk
characteristics  of the  portfolio  in the  aggregate.  This  review  takes into
consideration  the  judgments  of the  responsible  lending  officers and senior
management,  and also those of bank  regulatory  agencies  that  review the loan
portfolio as part of the regular bank  examination  process.  In evaluating  the
allowance,  management  also considers the loan loss experience of the Bank, the
amount of past due and  nonperforming  loans,  current and anticipated  economic
conditions, lender requirements and other appropriate information.

                                       18
<PAGE>


     Management allocated the allowance for loan losses to specific loan classes
as follows:
<TABLE>

                     Allocation of Allowance for Loan Losses

<CAPTION>
                                                              December 31,
                      -----------------------------------------------------------------------------------------------
                             2003                2002               2001              2000               1999
                      -------------------  -----------------  ---------------     ----------------   ----------------
                                  Percent            Percent            Percent            Percent            Percent
                                 of Loans           of Loans           of Loans           of Loans           of Loans
                                  in Each            in Each            in Each            in Each            in Each
                                 Category           Category           Category           Category           Category
                                 to Total           to Total           to Total           to Total           to Total
                        Amount     Loans    Amount    Loans    Amount    Loans    Amount    Loans    Amount    Loans
                      ---------  --------  -------  --------  -------  --------   ------  --------  -------  --------
                                                            (Dollars in Thousands)

Domestic Loans (1)
  Commercial, financial
<S>                   <C>             <C>  <C>           <C>  <C>           <C>   <C>          <C>  <C>           <C>
    and agricultural  $   1,257       10%  $ 1,615       11%  $   807       12%   $  387       17%  $   349       21%
  Real estate -
    construction....        184       32        85       25       193       22       199       10       152        8
  Real estate - other     1,277       50     1,044       55     1,760       59     1,381       64     1,120       61
  Consumer..........        267        6       168        7       235        7       244        8       228        9
  Other.............        625        2       326        2        --        0        --        1        --        1
                      ---------  -------   -------  -------   -------  -------    ------  -------   -------  -------

    Total...........  $   3,610      100%    3,238      100%  $ 2,995      100%   $2,211      100%  $ 1,849      100%
                      =========  =======   =======  =======   =======  =======    ======  =======   =======  =======

</TABLE>

(1)  The Bank had no foreign loans.

Nonperforming Assets

     Nonperforming assets include nonperforming loans and foreclosed real estate
held for sale.  Nonperforming  loans include  loans  classified as nonaccrual or
renegotiated.  The Bank's policy is to place a loan on nonaccrual status when it
is  contractually  past  due 90  days  or more as to  payment  of  principal  or
interest, unless the collateral value is greater than both the principal due and
the  accrued  interest.  At the  time a loan is  placed  on  nonaccrual  status,
interest  previously  accrued but not collected is reversed and charged  against
current  earnings.  Recognition  of any interest after a loan has been placed on
nonaccrual status is accounted for on a cash basis.

     The Bank had  nonperforming  assets at December 31, 2003, 2002, 2001, 2000,
and 1999 of  approximately  $2,385,000,  $6,143,000,  $1,787,000,  $556,000  and
$368,000, respectively.

     The following table presents information concerning outstanding balances of
nonperforming  assets at December 31, 2003,  and for each of the preceding  four
years.

<TABLE>
                                              Nonperforming Assets

<CAPTION>
                                                                           December 31,
                                               --------------------------------------------------------------------
                                                  2003          2002           2001          2000          1999
                                               -----------   -----------   -----------   -----------    -----------
                                                               (Amounts in thousands, except ratios)

<S>                                            <C>           <C>           <C>           <C>            <C>
Nonaccruing loans ..........................   $     1,127   $     4,823   $     1,642   $       385    $       344
Loans past due 90 days or more..............           521           334            12            24             24
Restructured loans..........................            --            --            --            --             --
                                               -----------   -----------   -----------   -----------    -----------
   Total nonperforming loans................         1,648         5,157         1,654           409            368
Nonaccruing securities......................            --            --            --            --             --
Other real estate...........................           737           986           133           147             --
                                               -----------   -----------   -----------   -----------    -----------

   Total nonperforming assets...............   $     2,385   $     6,143   $     1,787   $       556    $       368
                                               ===========   ===========   ===========   ===========    ===========

Ratios:
   Loan loss allowance to total
   nonperforming assets                               1.51          0.53          1.68          3.98           5.02
                                               ===========   ===========   ===========   ===========    ===========


   Total nonperforming loans to total loans
     (net of unearned interest).............          0.50%         1.73%        0.66%          0.26%          0.22%
                                               ===========   ===========  ===========    ===========    ===========


   Total nonperforming assets to total assets         0.58%         1.60%        0.56%          0.21%          0.16%
                                               ===========     =========  ===========   ============    ===========
</TABLE>

                                       19
<PAGE>


     It is the general policy of the Bank to stop accruing  interest  income and
place  the  recognition  of  interest  on a  cash  basis  when  any  commercial,
industrial  or real estate loan is past due as to  principal or interest and the
ultimate  collection  of either  is in  doubt.  Accrual  of  interest  income on
consumer  installment  loans is  suspended  when any  payment  of  principal  or
interest, or both, is more than ninety days delinquent. When a loan is placed on
a  nonaccrual  basis,  any  interest  previously  accrued but not  collected  is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued  interest or a guarantor  assures payment of interest.  For
each of the five years in the period ended  December 31,  2003,  the  difference
between gross interest  income that would have been recorded in such period,  if
the nonaccruing  loans had been current in accordance with their original terms,
and the amount of  interest  income on those  loans,  that was  included in such
period's net income, was negligible.

     There  has  been  no  significant  impact  on  the  Company's  consolidated
financial  statements  as a result of the  provisions  of Statement of Financial
Accounting  Standards No. 114, Accounting by Creditors for Impairment of a Loan,
or  Statement of  Accounting  Standards  No. 118,  Accounting  by Creditors  for
Impairment of a Loan--Income Recognition and Disclosures.

Deposits

     The  Company's  primary  source of funds is derived  from  deposits  of the
Bank's  customers.   Average  deposits   increased  10.3%,  from   approximately
$290,961,000  in 2002 to  approximately  $320,833,000  in 2003.  At December 31,
2003,  total  deposits were  $332,918,948,  of which  $309,123,161  (92.9%) were
interest  bearing,  at December 31, 2002, total deposits were  $316,282,756,  of
which  $294,385,698  (93.1%) were  interest  bearing,  and at December 31, 2001,
total deposits were $264,028,007,  of which  $247,194,423  (93.6%) were interest
bearing. The continued growth of the Bank fueled the growth in the deposit base.
The Company intends to emphasize  internal deposit growth in order to expand the
consumer  bases  of  the  Bank  and  to  continue  to  fund  asset  growth  when
appropriate.  Alternative  funding  sources  such as national  CDs and  brokered
deposits  were  used to  supplement  funding  sources.  Brokered  deposits  were
$10,000,000 at December 31, 2003.

     The average amounts of, and the average rate paid on, each of the following
categories of deposits,  for the years ended  December 31, 2003,  2002 and 2001,
are as follows:

<TABLE>
<CAPTION>
                                                                Years ended December 31,
                                      -----------------------------------------------------------------------------
                                                2003                      2002                       2001
                                      ------------------------  ------------------------  -------------------------
                                        Amount        Rate         Amount        Rate        Amount        Rate
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                                                 (Dollars in thousands)

<S>                                   <C>                <C>    <C>                <C>    <C>                <C>
Noninterest-bearing demand deposits.  $    22,056        0.00%  $   19,549         0.00%  $    13,972        0.00%

Demand..............................       83,040        1.42       62,492         1.93        39,100        2.55
Savings.............................       45,318        0.92       41,359         1.72        35,513        3.03
Time deposits.......................      170,419        3.15      167,561         4.44       153,348        6.02
                                      -----------               ----------                -----------
   Total interest-bearing deposits..      298,777        2.33      271,412         3.45       227,961        4.95
                                      -----------               ----------                -----------

   Total average deposits...........  $   320,833        2.17   $  290,961         3.21   $   241,933        4.67
                                      ===========               ==========                ===========
</TABLE>

     The  two  categories  of  lowest  cost  deposits  comprised  the  following
percentages of average total deposits during 2003:  average  noninterest-bearing
demand deposits,  6.87 percent; and average savings deposits,  14.13 percent. Of
average time  deposits,  approximately  38.89  percent  were large  denomination
certificates of deposit.  The maturities of the time  certificates of deposit of
$100,000 or more, issued by the Bank at December 31, 2003, are summarized in the
table below.
<TABLE>
<CAPTION>

                        Maturities of Large Time Deposits

                                                                                                          Time
                                                                                                      Certificates
                                                                                                       of Deposit
                                                                                                     --------------
                                                                                                 (Amounts in thousands)

<S>                                                                                                  <C>
         Three months or less.....................................................................   $       15,818
         Over three through six months............................................................           16,957
         Over six through twelve months...........................................................           29,836
         Over twelve months.......................................................................           23,945
                                                                                                     --------------

              Total...............................................................................   $       86,556
                                                                                                     ==============
</TABLE>

                                       20
<PAGE>


Short-term Borrowings

     Securities  sold under  agreements to repurchase  amounted to $4,085,992 at
December 31, 2003,  compared to $5,928,624 at December 31, 2002,  and $1,732,699
at December 31, 2001. The weighted average rates were 1.23%, 1.60% and 3.20% for
2003,  2002  and  2001,  respectively.   Securities  sold  under  agreements  to
repurchase  averaged  $5,488,443  during  2003,   $4,061,294  during  2002,  and
$1,930,051  during 2001. The maximum amount  outstanding at any month end during
2003 was $8,211,269, during 2002 was $5,928,624, and during 2001 was $3,144,208.
The  total  amount  of  securities  sold  under  agreements  to  repurchase  are
associated  with the cash  flow  needs of the  Bank's  corporate  customers  who
participate in repurchase agreements. In addition, the Company had federal funds
purchased  that amounted to $3,000,000  at year-end  2003,  and $-0- at year-end
2002, compared to $1,932,000 at year-end 2001.

Long-term Debt

     Borrowed  funds  consist   primarily  of  long-term   debt.  The  Bank  had
$21,000,000 in available lines to purchase Federal Funds, on an unsecured basis,
from  commercial  banks.  The Bank was  approved  to borrow up to  approximately
$61,360,000  under  various  short-term  and long-term  programs  offered by the
Federal Home Loan Bank of Atlanta.  These borrowings are secured under a blanket
lien agreement on certain qualifying mortgage instruments in loan and securities
portfolios.   The  unused   portion  of  these   available   funds  amounted  to
approximately  $30,600,000 at year-end 2003. Long-term debt consisted of various
commitments with scheduled maturities from one to six years. In addition, during
2002 the Company borrowed $4.6 million from another  financial  institution (See
"Capital Resources: Term Loan" below). This loan was repaid during 2003.

     On August 28, 2003,  Appalachian  Capital Trust I ("the Trust"), a Delaware
statutory trust established by the Company, received $6,000,000 principal amount
of the Trust's floating rate cumulative  trust preferred  securities (the "Trust
Preferred  Securities") in a trust preferred private placement.  The proceeds of
that  transaction  were then used by the Trust to  purchase  an equal  amount of
floating  rate-subordinated  debentures (the  "Subordinated  Debentures") of the
Company. The Company has fully and unconditionally guaranteed all obligations of
the  Trust  on  a  subordinated  basis  with  respect  to  the  Trust  Preferred
Securities.  In accordance with the provisions of Financial  Interpretation  No.
46, the Company accounts for the Trust Preferred  Securities as a long-term debt
liability  to  the  Trust  in the  amount  of  $6,186,000.  Subject  to  certain
limitations, the Trust Preferred Securities qualify as Tier 1 capital.

     The sole asset of the Trust is the  Subordinated  Debentures  issued by the
Company.  Both the Trust Preferred  Securities and the  Subordinated  Debentures
have approximately  30-year lives.  However, both the Company and the Trust have
options  to call  their  respective  securities  after  five  years,  subject to
regulatory  capital  requirements.  Interest  that the bank  plans to pay on the
trust preferred securities debt is included in the table of maturities below.

     The following  table sets forth the expected debt service for the next five
years based on interest rates and repayment provisions as of December 31, 2003.

<TABLE>
                          Maturities of Long-term Debt
                                 (In thousands)
<CAPTION>

                                                          2004        2005        2006        2007         2008
                                                       ---------   ---------    --------    --------    -----------

<S>                                                    <C>         <C>          <C>         <C>         <C>
   Interest on indebtedness.........................   $     830   $     869    $    614    $      500  $       466
   Repayment of principal...........................       7,243       6,200       6,200           700        5,350
                                                       ---------   ---------    --------    ----------  -----------

                                                       $   8,073   $   7,069    $  6,814    $    1,200  $     5,816
                                                       =========   =========    ========    ==========  ===========
</TABLE>

Shareholders' Equity

     Shareholders'  equity  increased  $5,463,064,  from  December  31,  2002 to
December 31, 2003, due in part to net earnings of  $3,086,580.  The increase was
also a result of the issuance of 82,170  shares of stock through the exercise of
options for $529,330 and the  reissuance of 128,240 shares out of treasury stock
for $1,923,601.

     All amounts  presented in this report and in the financial  statements  are
adjusted to reflect the 10% stock dividend effected in July 2003, as well as the
2-for-1 stock split  effected in April 2000.  See ITEM 5, "Market  Information."
Return on Equity and Assets

                                       21
<PAGE>

     The following table summarizes certain financial ratios for the Company for
the years ended December 31, 2003, 2002 and 2001.
<TABLE>
<CAPTION>

                           Return on Equity and Assets

                                                                                 Year ended December 31,
                                                                     ----------------------------------------------
                                                                         2003             2002            2001
                                                                     -------------   -------------   --------------

<S>                                                                           <C>              <C>             <C>
           Return on average assets.............................              0.78%            0.75%           0.85%
           Return on average equity.............................             10.85            11.88           12.80
           Dividend payout ratio................................              0.00             0.00            0.00
           Average equity to average assets ratio...............              7.23             6.34            6.63
</TABLE>


Capital Resources

     A strong capital  position is vital to the continued  profitability  of the
Company  because it promotes  depositor and investor  confidence  and provides a
solid  foundation  for future  growth of the  organization.  A  majority  of the
Company's  capital  requirements have come from proceeds from the Bank's initial
stock  offering in 1994,  proceeds of $2.65 million from a private  placement of
Common Stock in November 1998,  proceeds of $4.4 million from a public  offering
in 2000,  proceeds of $787,000 from a private  offering of Common Stock and $1.0
million from the exercise of options in 2002,  through the retention of earnings
and the sale of Common Stock to the Company's  401(k) plan in 2002,  proceeds of
$1.9  million  from a private  offering of Common  Stock and  $529,000  from the
exercise of options in 2003.

     On August 28, 2003,  Appalachian  Capital Trust I ("the Trust"), a Delaware
statutory trust established by the Company, received $6,000,000 principal amount
of the Trust's floating rate cumulative  trust preferred  securities (the "Trust
Preferred  Securities") in a trust preferred private placement.  The proceeds of
that  transaction were used by the Trust to purchase an equal amount of floating
rate-subordinated debentures (the "Subordinated Debentures") of the Company. The
Company has fully and unconditionally guaranteed all obligations of the Trust on
a subordinated basis with respect to the Trust Preferred Securities. The Company
accounts for the Trust Preferred  Securities as a minority  interest of $186,000
and as a  long-term  debt  liability  in the  amount of  $6,186,000.  Subject to
certain  limitations,  the Trust Preferred  Securities qualify as Tier 1 capital
and are  presented in the  consolidated  statements  of  financial  condition as
"Guaranteed   preferred  beneficial  interest  in  the  Company's   subordinated
debentures."

     The sole asset of the Trust is the  Subordinated  Debentures  issued by the
Company.  Both the Trust Preferred  securities and the  Subordinated  Debentures
have approximately  30-year lives.  However, both the Company and the Trust have
options  to call  their  respective  securities  after  five  years,  subject to
regulatory capital requirements.

     Term Loan. On April 3, 2002, the Company  obtained a $4.6 million term loan
under a Loan and Stock Pledge Agreement and a Promissory Note (collectively, the
"Term Loan") with Crescent Bank and Trust Company. The Company used $4.6 million
of the  proceeds of the Term Loan to repay that  certain  loan and stock  pledge
agreement,  dated  April 3, 2000,  previously  entered  into by and  between the
Company and Crescent Bank and Trust Company. Interest on the outstanding amounts
under the Term Loan was payable quarterly, commencing July 1, 2002, at the prime
rate (as defined in the Promissory Note) less twenty-five (25) basis points. The
Company  began making  interest  payments on July 1, 2002.  Principal was due in
seven equal annual  installments,  each in the amount of $657,000,  beginning on
March 31, 2003. The entire outstanding  balance of the Term Loan,  together with
all  accrued  and unpaid  interest,  would have been due and  payable in a final
installment on March 31, 2010. The Term Loan contained  certain  affirmative and
negative  covenants,  including,  but not limited to,  requiring  the Company to
cause the Bank at all times to maintain  certain minimum capital ratios,  and to
maintain a minimum  ratio of loan and lease losses to gross loans.  In September
2003,  the Company paid off this entire  balance with part of the proceeds  from
the trust preferred issuance.

     Federal Capital  Standards.  Regulatory  authorities are placing  increased
emphasis on the maintenance of adequate capital. In 1990, new risk-based capital
requirements  became effective under the Federal Deposit  Insurance  Corporation
Improvement Act. The guidelines take into consideration risk factors, as defined
by regulators, associated with various categories of assets, both on and off the
balance sheet. Under the guidelines,  capital strength is measured in two tiers,
which  are used in  conjunction  with  risk-adjusted  assets  to  determine  the

                                       22
<PAGE>

risk-based  capital  ratios.  The Company's  Tier 1 capital,  which  consists of
common equity, paid-in capital, retained earnings and qualifying trust preferred
securities  (less  intangible  assets and  treasury  stock),  amounted  to $34.7
million at December 31, 2003.  Tier 2 capital  components  include  supplemental
capital  components  such as  qualifying  allowance  for loan  losses  and trust
preferred securities not qualified for Tier 1 capital.  Tier 1 capital, plus the
Tier 2 capital components, is referred to as Total Capital and was $38.3 million
at year-end 2003. The Company's percentage ratios as calculated under regulatory
guidelines were 10.46% and 11.55% for Tier 1 and Total Capital, respectively, at
year-end  2003.  The  Company's  Tier 1 Capital and Total  Capital  exceeded the
minimum ratios of 4% and 8%, respectively.

     Another important  indicator of capital adequacy in the banking industry is
the  leverage  ratio.   The  leverage  ratio  is  defined  as  the  ratio  which
shareholders'   equity,   minus   intangibles,   bears  to  total  assets  minus
intangibles.  At December  31, 2003,  the  Company's  leverage  ratio was 8.58%,
exceeding the regulatory minimum requirement of 4%.

     The table below illustrates the Company's  regulatory  capital ratios under
federal guidelines at December 31, 2003, 2002 and 2001:

<TABLE>
                                                    Capital Adequacy Ratios
<CAPTION>

                                                                                   Years ended December 31,
                                                             Statutory     ----------------------------------------
                                                              Minimum          2003          2002          2001
                                                            ------------   -----------   -----------    -----------
                                                                          (Amounts in thousands, except percentages)

<S>    <C>                                                                 <C>           <C>            <C>
  Tier 1 Capital..........................................                 $    34,681   $    23,089    $    18,538

  Tier 2 Capital..........................................                       3,610         3,238          2,995
                                                                           -----------   -----------    -----------

  Total Qualifying Capital................................                 $    38,291   $    26,327    $    21,533
                                                                           ===========   ===========    ===========

  Risk Adjusted Total Assets (including
  off-balance-sheet exposures)............................                 $   331,638   $   306,405    $   256,985

  Tier 1 Risk-Based Capital Ratio.........................       4.0%            10.46%         7.54%          7.16%

  Total Risk-Basked Capital Ratio.........................       8.0             11.55          8.59           8.32

  Leverage Ratio..........................................       4.0              8.58          6.07           5.87

</TABLE>

     In 2001,  the Bank paid  dividends to the Company of  $250,000,  which were
used by the Company for the  repayment of debt and other  expenses.  In 2003 and
2002, the Bank did not pay dividends to the Company.

Liquidity Management

     Liquidity  is defined as the  ability of a company to convert  assets  into
cash or cash equivalents without significant loss. Liquidity management involves
maintaining the Bank's  abilities to meet the day-to-day cash flow  requirements
of its  customers,  whether  they are  depositors  wishing to withdraw  funds or
borrowers  requiring funds to meet their credit needs.  Without proper liquidity
management,  the Bank  would not be able to  perform  its  primary  function  as
financial intermediary and, therefore,  would not be able to meet the production
and growth needs of the communities it serves.

     The primary  purpose of management of assets and liabilities is not only to
assure  adequate  liquidity  in  order  for the  Bank to meet  the  needs of its
customers,    but   also   to   maintain   an   appropriate    balance   between
interest-sensitive assets and interest-sensitive liabilities so that the Company
can also meet the investment requirements of its shareholders.  Daily monitoring
of the sources and uses of funds is  necessary  to maintain an  acceptable  cash
position that meets both requirements.  In the banking environment,  both assets
and liabilities are considered sources of liquidity funding; therefore, both are
monitored on a daily basis.

     The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments or sales of investment and trading account securities.
Real estate  construction and commercial,  financial and agricultural loans that
mature in one year or less equaled  approximately $117.9 million or 35.5% of the
total loan portfolio at December 31, 2003, and investment securities maturing in
one year or less equaled $7.4 million or 13.3% of the  portfolio.  Other sources
of liquidity include short-term investments such as federal funds sold.

                                       23
<PAGE>

     The  liability  portion of the balance  sheet  provides  liquidity  through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of fiscal  2003,  funds were also  available  through  the  purchase  of
federal funds from correspondent  commercial banks from available lines of up to
an aggregate of $21,000,000.

     In an effort to maintain  and improve the  liquidity  position of the Bank,
management applied for membership with the Federal Home Loan Bank of Atlanta. As
a member of the Federal Home Loan Bank,  the Bank is able to improve its ability
to manage  liquidity and reduce interest rate risk by having a funding source to
match  longer  term  loans.  The  Bank's  credit  line  stands at  approximately
$61,360,000  as of  December  31,  2003.  This  line is  subject  to  collateral
availability. At December 31, 2003, the outstanding balance of the Bank's credit
line  was  $30,692,858.  See  Note 12 to the  Notes  to  Consolidated  Financial
Statements herein.

Off-Balance Sheet Arrangements

     In the normal course of business, the Company offers a variety of financial
products  to its  customers  to aid  them  in  meeting  their  requirements  for
liquidity, credit enhancement, and interest rate protection.  Generally accepted
accounting  principles  recognize these  transactions as contingent  liabilities
and,  accordingly,   they  are  not  reflected  in  the  accompanying  financial
statements.  Commitments to extend credit, credit card arrangements,  commercial
letters of credit,  and standby  letters of credit all include  exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial  guarantees are the
same as those for  extension  of credit that are  recorded on the  statement  of
financial  condition.  Because these  instruments have fixed maturity dates, and
because  many of them expire  without  being drawn upon,  they do not  generally
present any  significant  liquidity  risk to the  Company.  Management  conducts
regular reviews of these  instruments on an individual  customer basis,  and the
results are considered in assessing the adequacy of the Company's  allowance for
loan losses.  Management  does not anticipate any material losses as a result of
these commitments.

Following is a discussion of these commitments:

     Standby  Letters  of  Credit:  These  agreements  are  used  by the  Bank's
customers as a means of improving their credit  standings in their dealings with
others.  Under  these  agreements,  the Bank agrees to honor  certain  financial
commitments  in the event that its  customers are unable to do so. The amount of
credit risk involved in issuing letters of credit in the event of nonperformance
by the other party is the contract amount. As of December 31, 2003 and 2002, the
Bank has  issued  standby  letters  of credit of  approximately  $1,111,000  and
$1,320,000.  The Bank records a liability for the estimated  fair value of these
standby letters of credit based on the fees charged for these arrangements.

     Loan  Commitments:  As  of  December  31,  2003  and  2002,  the  Bank  had
commitments outstanding to extend credit totaling approximately  $43,436,000 and
$35,890,000,  respectively. These commitments generally require the customers to
maintain certain credit  standards.  Management does not anticipate any material
losses as a result of these commitments.



              [The remainder of this page intentionally left blank]



                                       24
<PAGE>


Contractual Obligations

     The Company and the Bank have  various  contractual  obligations  that they
must  fund as  part of  their  normal  operations.  The  following  table  shows
aggregate information about their contractual  obligations,  including interest,
and the periods in which  payments  are due.  The  amounts and time  periods are
measured from December 31, 2003.

<TABLE>
<CAPTION>
                                                               Payments due by period (in thousands)
                                            -----------------------------------------------------------------------
                                                             Less than                                   More than
                                                 Total        1 year         1-3 years    3-5 years       5 years
                                            --------------  ------------   -----------   -----------    -----------

<S>                                         <C>             <C>            <C>           <C>            <C>
  Long-Term Debt........................    $       40,414  $      8,073   $    13,883   $     7,016    $    11,442
  Capital Lease Obligations.............                --            --            --            --             --
  Operating Lease Obligations...........             1,021            64            83            71            803
  Other Long-Term Liabilities
     Reflected on the Company's
     Balance Sheet under GAAP...........                --            --            ---           --             --
                                            --------------  ------------   ------------  -----------    -----------

  Total.................................    $       41,435  $      8,137   $    13,966   $     7,087    $    12,245
                                            ==============  ============   ===========   ===========    ===========
</TABLE>

Interest Rate Sensitivity Management

     Interest rate sensitivity is a function of the repricing characteristics of
the Bank's portfolios of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities are
subject to changes in interest  rates,  either at replacement or maturity during
the life of the instruments.  Sensitivity is measured as the difference  between
the volume of assets and  liabilities  in the Bank's  current  portfolio that is
subject to  repricing  in future  time  periods.  The  differences  are known as
interest  rate  sensitivity  gaps  and are  usually  calculated  separately  for
segments of time,  ranging from zero to thirty days,  thirty-one to ninety days,
ninety-one  days to one  year,  one to five  years,  over  five  years  and on a
cumulative basis.




              [The remainder of this page intentionally left blank]


                                       25
<PAGE>



     The  following  tables  show  interest  rate  sensitivity  gaps  for  these
different intervals as of December 31, 2003.

<TABLE>
                                           Interest Rate Sensitivity Analysis
<CAPTION>

                                         0-30         31-90        90-365         1-5        Over 5
                                         Days         Days          Days         Years        Years        Total
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                                              (In thousands, except ratios)

Interest-earning assets (1)
<S>                                   <C>          <C>          <C>          <C>          <C>           <C>
   Loans............................  $    22,353  $   112,122  $    82,653  $   105,881  $     8,171   $   331,180
   Securities:
     Taxable........................          415           --        6,947       23,652        9,994        41,008
     Tax-exempt.....................           --           --           --          276       14,079        14,355
   Time deposits in other banks.....          274           --           --           --           --           274
   Federal funds sold...............          586           --           --           --           --           586
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                           23,628      112,122       89,600      129,809       32,244       387,403
                                      -----------  -----------  -----------  -----------  -----------   -----------
Interest-bearing liabilities (2)
   Demand deposits (3)..............       25,236       25,236       25,236           --           --        75,708
   Savings deposits (3).............       16,202       16,203       16,203           --           --        48,608
   Time deposits....................       12,230       26,714       95,827       50,036           --       184,807
   Other short-term borrowings......        7,086           --           --           --           --         7,086
   Long-term debt...................          100          550        6,593       18,450       11,186        36,879
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                           60,854       68,703      143,859       68,486       11,186       353,088
                                      -----------  -----------  -----------  -----------  -----------   -----------

Interest sensitivity gap............  $   (37,226) $    43,419  $   (54,259) $    61,323  $    21,058   $    34,315
                                      ===========  ===========  ===========  ===========  ===========   ===========

Cumulative interest sensitivity gap.  $   (37,226) $     6,193  $   (48,066) $    13,257  $    34,315
                                      ===========  ===========  ===========  ===========  ===========

Ratio of interest-earning assets to
   interest-bearing liabilities.....         0.39         1.63         0.62         1.90         2.88
                                      ===========  ===========  ===========  ===========  ===========

Cumulative ratio....................         0.39         1.05         0.82         1.06         1.10
                                      ===========  ===========  ===========  ===========  ===========

Ratio of cumulative gap to total
   interest-earning assets..........        (0.10)        0.02        (0.12)        0.03         0.09
                                      ===========  ===========  ===========  ===========  ===========
<FN>
_________________

(1) Excludes  nonaccrual  loans  and  securities.
(2) Excludes  matured certificates  which  have  not been  redeemed  by the customer  and on which no interest is accruing.
(3) Demand and savings deposits are assumed to be subject to movement into other deposit instruments in equal amounts during the
    0-30 day period, the 31-90 day period, and the 91-365 day period.
</FN>

</TABLE>


     The above table indicates that, in a rising interest rate environment,  the
Company's  earnings  may be  adversely  affected in the 0-365 day periods  where
liabilities will reprice faster than assets. As seen in the preceding table, for
the   first  30  days  of   repricing   opportunity,   there  is  an  excess  of
interest-bearing  liabilities over earning assets of approximately  $37 million.
For the first 365 days,  interest-bearing  liabilities  exceed earning assets by
approximately  $48  million.  During  this  one-year  time  frame,  77.4% of all
interest-bearing   liabilities   will   reprice   compared   to   58.2%  of  all
interest-earning  assets.  Changes  in the mix of earning  assets or  supporting
liabilities  can either  increase or decrease  the net interest  margin  without
affecting  interest  rate  sensitivity.  In addition,  the interest  rate spread
between an asset and its supporting  liability can vary significantly  while the
timing of repricing for both the asset and the liability  remain the same,  thus
impacting net interest  income.  It should be noted,  therefore,  that a matched
interest-sensitive  position by itself  would not ensure  maximum  net  interest
income.

     Management  continually evaluates the condition of the economy, the pattern
of market  interest  rates and other  economic  data to  determine  the types of
investments  that should be made and at what  maturities.  Using this  analysis,
management from time to time assumes  calculated  interest rate  sensitivity gap
positions to maximize net interest  income based upon  anticipated  movements in
the general level of interest rates.


                                       26
<PAGE>


     The table  below  shows,  for the  periods  indicated,  the  daily  average
balances  outstanding for the major  categories of  interest-bearing  assets and
interest-bearing  liabilities,  and the  average  interest  rate  earned or paid
thereon. Such yields are calculated by dividing income or expense by the average
balance of the corresponding assets or liabilities.
<TABLE>

                             Average Balances, Interest Income/Expense and Yields/Rates
                                            Taxable Equivalent Basis

<CAPTION>
                                                                       Years Ended December 31,
                                         ------------------------------------------------------------------------------------
                                                    2003                          2002                        2001
                                         ----------------------------  --------------------------  --------------------------
                                                  Interest    Average           Interest  Average           Interest  Average
                                         Average   Income/    Yields/  Average   Income/  Yields/  Average   Income/  Yields/
                                         Balance   Expense     Rates   Balance   Expense   Rates   Balance   Expense   Rates
                                         -------  --------    -------  -------  --------  -------  -------  --------  -------
                                                                            (Dollars in thousands)
Assets
   Earning assets:
     Loans, net of unearned
<S>           <C>                       <C>       <C>           <C>   <C>       <C>         <C>   <C>       <C>         <C>
       income (1).......                $316,605  $ 21,227      6.70% $276,733  $ 20,420    7.38% $234,031  $ 21,295    9.10%
     Securities:
       Taxable..........                  34,938     1,059      3.03    34,718     1,647    4.74    28,212     1,743    6.18
       Tax-exempt.......                  15,013     1,073      7.15    16,215     1,201    7.41    12,250       816    6.66
                                        --------   -------            --------   -------          --------   -------
     Total securities...                  49,951     2,132      4.27    50,933     2,848    5.59    40,462     2,559    6.32

     Interest-bearing deposits               784        30      3.83     1,007        13    1.29       387         5    1.29
     Federal funds sold.                   3,314        37      1.12     5,104        79    1.55     6,004       367    6.11
                                        --------   -------            --------   -------          --------   -------
       Total interest-
        earning assets (2)               370,654    23,426      6.32   333,777    23,360    7.00   280,884    24,226    8.62

   Non interest-earning assets:
     Cash and due from banks               8,118                         6,909                       5,190
     Premises and equipment                8,795                         7,835                       6,791
     Accrued interest and
       other assets.....                   9,436                         8,790                       8,889
     Allowance for loan losses            (3,450)                       (3,147)                     (2,587)
                                        --------                      --------                    --------

Total assets............                $393,553                      $354,164                    $299,167
                                        ========                      ========                    ========

Liabilities and
   Shareholders' Equity
   Interest-bearing liabilities:
     Demand deposits....                $ 83,040     1,178      1.42% $ 62,492     1,209    1.93% $ 39,100       996    2.55%
     Savings deposits...                  45,318       418      0.92    41,359       712    1.72    35,513     1,075    3.03
     Time deposits......                 170,419     5,363      3.15   167,561     7,432    4.44   153,348     9,224    6.02
                                        --------   -------            --------   -------          --------   -------
       Total deposits...                 298,777     6,959      2.33   271,412     9,353    3.45   227,961    11,295    4.95

   Other short-term borrowings             6,422        83      1.29     4,667        77    1.65     2,278       100    4.39
   Long-term debt.......                  35,782     1,214      3.39    34,017     1,995    5.86    33,028     2,280    6.90
                                        --------   -------            --------   -------          --------   -------
       Total interest-
         bearing liabilities             340,981     8,256      2.42   310,096    11,425    3.68   263,267    13,675    5.19
                                                   -------                       -------                     -------

   Noninterest-bearing liabilities:
     Demand deposits....                  22,056                        19,549                      13,972
     Accrued interest and
       other liabilities                   2,069                         2,065                       2,107
     Shareholders' equity                 28,447                        22,454                      19,821
                                        --------                      --------                    --------

Total liabilities and
   shareholders' equity.                $393,553                      $354,164                    $299,167
                                        ========                      ========                    ========

Net interest income/net
   interest spread......                            15,170      3.90%             11,935    3.31%             10,551    3.43%
                                                              ======                      ======                      ======

Net yield on earning assets                                     4.09%                       3.58%                       3.76%
                                                              ======                      ======                      ======
Taxable equivalent adjustment:
   Loans................                                63                            57                          57
   Investment securities                               367                           411                         279
                                                   -------                       -------                     -------
     Total taxable
       equivalent adjustment                           430                           468                         336
                                                   -------                       -------                     -------

Net interest income.....                          $ 14,740                      $ 11,467                    $ 10,215
                                                  ========                      ========                    ========

<FN>
(1) Average loans include nonaccrual loans.  All loans and deposits are domestic
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34
    percent,  and do not give effect to the disallowance for federal income tax
    purpose of interest expense related to certain tax-exempt earning assets.
</FN>
</TABLE>


                                       27
<PAGE>


     The following tables set forth, for the years ended December 31, 2003, 2002
and 2001,  a summary of the  changes in  interest  income and  interest  expense
resulting from changes in interest rates and in changes in the volume of earning
assets and interest-bearing liabilities,  segregated by category. The change due
to volume is calculated by multiplying  the change in volume by the prior year's
rate. The change due to rate is calculated by multiplying  the change in rate by
the prior  year's  volume.  The change  attributable  to both volume and rate is
calculated by  multiplying  the change in volume by the change in rate.  Figures
are presented on a taxable equivalent basis.
<TABLE>

                          Rate/Volume Variance Analysis
                            Taxable Equivalent Basis

<CAPTION>
                                     Average Volume             Change in Volume             Average Rate
                             -------------------------------  --------------------  -------------------------------
                               2003       2002       2001     2003-2002  2002-2001    2003       2002        2001
                             ---------  ---------  ---------  ---------  ---------  --------   --------   ---------
Earning assets:                                              (Dollars in thousands)

Loans, net of unearned
<S>      <C>                 <C>        <C>        <C>        <C>        <C>           <C>        <C>         <C>
  income (1)                 $ 316,605  $ 276,733  $ 234,031  $  39,872  $  42,702     6.70%      7.38%       9.10%

Investment Securities:
   Taxable.................     34,938     34,718     28,212        220      6,506     3.03       4.74        6.18
   Tax exempt..............     15,013     16,215     12,250     (1,202)     3,965     7.15       7.41        6.66
                             ---------  ---------  ---------  ---------- ---------
     Total investment
     securities                 49,951     50,933     40,462       (982)    10,471     4.27       5.59        6.32
                             ---------  ---------  ---------  ---------  ---------
Interest-bearing deposits
  with other banks                 784      1,007        387       (223)       620     3.83       1.29        1.29
Federal funds sold.........      3,314      5,104      6,004     (1,790)      (900)    1.12       1.55        6.11
                             ---------  ---------  ---------  ---------  ---------
     Total earning assets..  $ 370,654  $ 333,777  $ 280,884  $  36,877  $  52,893     6.32       7.00        8.62
                             =========  =========  =========  =========  =========

Interest-bearing liabilities:
Deposits:
   Demand..................  $  83,040  $  62,492  $  39,100  $  20,548  $  23,392     1.42       1.93        2.55
   Savings.................     45,318     41,359     35,513      3,959      5,846     0.92       1.72        3.03
   Time....................    170,419    167,561    153,348      2,858     14,213     3.15       4.44        6.02
                             ---------  ---------  ---------  ---------  ---------
     Total deposits........    298,777    271,412    227,961     27,365     43,451     2.33       3.45        4.95

Other short-term borrowings      6,422      4,667      2,278      1,755      2,389     1.29       1.65        4.39
Long-term debt.............     35,782     34,017     33,028      1,765        989     3.39       5.86        6.90
                             ---------  ---------  ---------  ---------  ---------
     Total interest-bearing
       liabilities.........  $ 340,981  $ 310,096  $ 263,267  $  30,885  $  46,829     2.42       3.68        5.19
                             =========  =========  =========  =========  =========

Net interest income/net
interest spread                                                                        3.90       3.31        3.43

Net yield on earning assets                                                            4.09       3.58        3.76

Net cost of funds..........                                                            2.23       3.42        4.87

                                                                                    Variance Attributed to (1)
                                     Interest                                   -----------------------------------
                                  Income/Expense               Variance               2003               2002
                           ---------------------------    --------------------    --------------   ----------------
                             2003      2002      2001     2003-2002  2002-2001   Volume    Rate     Volume    Rate
                           --------  -------   -------    ---------  ---------   -------  -------   -------  -------
                             (Dollars in thousands)
Earning assets:
  Loans, net of
   unearned income.......  $ 21,227  $20,420   $21,295    $     807    $  (875)  $ 2,778  $(1,971)  $ 3,525  $(4,400)
Investment Securities:
  Taxable................     1,059    1,647     1,743         (588)       (96)       10     (598)      355     (451)
  Tax exempt.............     1,073    1,201       816         (128)       385       (87)     (41)      286       99
                           --------  -------   -------    ---------    -------   -------  -------   -------  -------
   Total investment
     securities               2,132    2,848     2,559         (716)       289       (77)    (639)      641     (352)
                           --------  -------   -------    ---------    -------   -------  -------   -------  -------

Interest-bearing deposits
  with other banks.......        30       13         5           17          8        (3)      20         8       --
Federal funds sold.......        37       79       367          (42)      (288)      (23)     (19)      (48)    (240)
                           --------  -------   -------    ---------    -------   -------  -------   -------  -------
   Total earning assets..    23,426   23,360    24,226           66       (866)    2,675   (2,609)    4,126   (4,992)
                           --------  -------   -------    ---------    -------   -------  -------   -------  -------

Interest-bearing liabilities:
Deposits:
  Demand.................     1,178    1,209       996          (31)       213       339     (370)      494     (281)
  Savings................       418      712     1,075         (294)      (363)       63     (357)      156     (519)
  Time...................     5,363    7,432     9,224       (2,069)    (1,792)      125   (2,194)      796   (2,588)
                            -------  -------   -------    ---------  ---------   -------  -------   -------  -------
   Total deposits........     6,959    9,353    11,295       (2,394)    (1,942)      527   (2,921)    1,446   (3,388)

Other short-term borrowings      83       77       100            6        (23)       25      (19)       64      (87)
Long-term debt...........     1,214    1,995     2,280         (781)      (285)       99     (880)       67     (352)
                           --------  -------   -------    ---------    -------   -------  -------   -------  -------
   Total interest-
     bearing liabilities.     8,256   11,425    13,675       (3,169)    (2,250)      651   (3,820)    1,577   (3,827)
                           --------  -------   -------    ---------    -------   -------  -------   -------  -------

Net interest income/net
interest spread..........  $ 15,170  $11,935   $10,551    $   3,235    $ 1,384   $ 2,024  $ 1,211   $ 2,549  $(1,165)
                           ========  =======   =======    =========    =======   =======  =======   =======  =======


<FN>
(1)  The change in interest due to both rate and volume has been allocated to
     volume and rate changes in proportion to the relationship of the absolute
     dollar amounts of the change in each.
</FN>
</TABLE>



                                       28
<PAGE>


Results of Operations

Comparison of Years Ended December 31, 2003 and 2002

Net Interest Income

     Net interest  income is the principal  source of the Bank's earnings stream
and  represents  the  difference,  or spread,  between  interest  and fee income
generated  from  earning  assets and the  interest  expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in  earning  assets  and  interest-bearing  liabilities  materially  impact  net
interest  income.   Net  interest  income  increased   $3,272,748  or  28.5%  to
$14,739,700 at December 31, 2003,  compared to $11,466,952 at December 31, 2002.
This  increase  was caused by an  increase in the Bank's  loan  portfolio  and a
decrease in interest rates on deposit  liabilities due to management's  focus on
funds management.

     Interest and fees earned on loans  increased  3.9% to  $21,163,875 in 2003,
compared to $20,363,641 in 2002. The increase in 2003 was primarily attributable
to the increase in the Bank's loan portfolio.

     Interest earned on taxable securities decreased 35.7% to $1,058,688 in 2003
from  $1,646,592  in 2002,  while  interest  earned  on  non-taxable  securities
decreased from $790,127 to $706,115 during the same period.  The variance in the
income figures  reflects a reallocation in the portfolio to maximize the earning
capacity of the portfolio.

     During 2003, interest on federal funds sold decreased $41,579 or 52.7% from
2002.  This  decrease in income is the result of the Bank  managing  its funding
needs to take  advantage  of the low  interest  rate  environment.  Interest  on
deposits with other banks increased to $30,224 in 2003, from $13,039 in 2002.

     The trend in net  interest  income is also  evaluated  in terms of  average
rates  using the net  interest  margin and the  interest  rate  spread.  The net
interest  margin,  or the net yield on earning  assets,  is computed by dividing
fully taxable  equivalent net interest income by average  earning  assets.  This
ratio  represents the  difference  between the average yield returned on average
earning assets and the average rate paid for funds used to support those earning
assets, including both interest-bearing and noninterest-bearing sources. The net
interest margin for 2003 was 4.09% compared to a net interest margin of 3.58% in
2002.

     The interest rate spread measures the difference  between the average yield
on  earning  assets and the  average  rate paid on  interest-bearing  sources of
funds. The interest rate spread  calculation  provides a more direct perspective
on the effect of market  interest rate  movements.  The net interest  spread was
3.90% in 2003, compared to 3.31% in 2002.

Interest Expense

     Total interest expense decreased $3,168,824 or 27.7% to $8,256,564 in 2003,
from  $11,425,388  in  2002.  This  decrease  was  the  combined  effect  of the
short-term  nature of the Bank's time deposits as well as management's  focus on
funds  management  and  the  net  interest  margin.  The  average  rate  paid on
interest-bearing  deposits  in 2003 and 2002 was 2.33% and 3.45%,  respectively.
The  effect  of  these   changes  was  to  decrease  the  interest   expense  on
interest-bearing  deposits to  $6,959,433  in 2003,  from  $9,352,768 in 2002, a
decrease of $2,393,335 or 25.6%.

Noninterest Income

     Noninterest  income for 2003 and 2002 totaled  $2,797,180  and  $2,937,144,
respectively.  These amounts are primarily from customer service fees, insurance
commissions  and  fees on  services  to  customers.  Mortgage  origination  fees
increased from $1,049,443 in 2002 to $1,276,787 in 2003, primarily due to a high
volume of mortgage  refinancings  in 2003 due to the  historically  low interest
rates.

Noninterest Expenses

     Noninterest  expenses totaled $11,731,985 in 2003,  $9,702,148 in 2002, and
$7,831,363  in  2001.  Salaries  and  benefits  increased  $790,885  or 16.3% to
$5,645,790 in 2003,  due to the Company's  decision to strengthen its management

                                       29
<PAGE>

in  anticipation  of future  growth as well as the  opening  of a branch in Blue
Ridge, Georgia.  Occupancy expenses totaled $980,704, an increase of $364,878 or
59.3%  over the  2002  total  of  $615,826.  Furniture  and  equipment  expenses
decreased  $290,336  or 31.5% in 2003,  due to the cost of opening the branch in
Blue Ridge,  Georgia during 2002. Other operating expenses increased  $1,164,410
or 35.2% to $4,474,256  in 2003,  due mainly to the fact that 2003 was the first
full year of operations of the branch in Blue Ridge, Georgia.

     The table  below  sets forth the  Company's  noninterest  expenses  for the
periods indicated.
<TABLE>
<CAPTION>

                                                                                       Years ended December 31,
                                                                                     ---------------------------
                                                                                        2003             2002
                                                                                     -----------     -----------
                                                                                        (Amounts in thousands)

<S>                                                                                  <C>             <C>
Salaries and employee benefits....................................................   $     5,646     $     4,756
Occupancy expense.................................................................           981             616
Professional and regulatory fees..................................................           948             676
Furniture and equipment expense...................................................           631             922
Data processing...................................................................           570              84
Advertising.......................................................................           516             567
Supplies..........................................................................           338             308
Director and committee fees.......................................................           315             405
Taxes and licenses................................................................           276             157
FDIC & state assessments..........................................................           179              78
Postage...........................................................................           150             164
Amortization expense..............................................................            94              76
Correspondent bank charges........................................................            90              78
Insurance.........................................................................            47              46
Checking account expense..........................................................            41              60
Other.............................................................................           910             709
                                                                                     -----------     -----------
   Total..........................................................................   $    11,732     $     9,702
                                                                                     ===========     ===========

</TABLE>

Income Taxes

     Net operating income of $4,339,895 in 2003 resulted in $1,253,315 of income
tax expense,  which  represents  an income tax rate of 28.9%.  The Company's net
operating  income of  $3,673,948  in 2002  resulted in  $1,005,940 of income tax
expense, which represented an income tax rate of 27.4%.



              [The remainder of this page intentionally left blank]

                                       30
<PAGE>


Comparison of Years Ended December 31, 2002 and 2001


Net Interest Income

     Net interest  income is the principal  source of the Bank's earnings stream
and  represents  the  difference,  or spread,  between  interest  and fee income
generated  from  earning  assets and the  interest  expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in  earning  assets  and  interest-bearing  liabilities  materially  impact  net
interest  income.   Net  interest  income  increased   $1,251,831  or  12.3%  to
$11,466,952 at December 31, 2002,  compared to $10,215,121 at December 31, 2001.
This increase was caused by growth in the Bank's loan portfolio,  as well as the
payoff of several Federal Home Loan Bank advances.

     Interest and fees earned on loans  decreased  4.1% to  $20,363,641 in 2002,
compared to $21,238,058 in 2001. The decrease in 2002 was primarily attributable
to the Federal Reserve's decision to lower interest rates during 2002.

     Interest earned on taxable securities  decreased 5.6% to $1,646,592 in 2002
from  $1,743,440  in 2001,  while  interest  earned  on  non-taxable  securities
increased from $536,689 to $790,127 during the same period.  The variance in the
income figures  reflects a reallocation in the portfolio to maximize the earning
capacity of the portfolio.

     During 2002,  interest on federal  funds sold  decreased  $287,929 or 78.5%
from  2001.  This  decrease  in income is the  result of the Bank  managing  its
funding needs to take advantage of the low interest rate  environment.  Interest
on deposits with other banks increased to $13,039 in 2002, from $4,891 in 2001.

     The trend in net  interest  income is also  evaluated  in terms of  average
rates  using the net  interest  margin and the  interest  rate  spread.  The net
interest  margin,  or the net yield on earning  assets,  is computed by dividing
fully taxable  equivalent net interest income by average  earning  assets.  This
ratio  represents the  difference  between the average yield returned on average
earning assets and the average rate paid for funds used to support those earning
assets, including both interest-bearing and noninterest-bearing sources. The net
interest  margin for 2002 was 3.58%  compared to a net  interest  rate margin of
3.76% in 2001.

     The interest rate spread measures the difference  between the average yield
on  earning  assets and the  average  rate paid on  interest-bearing  sources of
funds. The interest rate spread  calculation  provides a more direct perspective
on the effect of market  interest rate  movements.  The net interest  spread was
3.31% in 2002, compared to 3.43% in 2001.




              [The remainder of this page intentionally left blank]

                                       31
<PAGE>



Interest Expense

     Total  interest  expense  decreased  $2,249,439 or 16.4% to  $11,425,388 in
2002,  from  $13,674,827 in 2001.  This decrease was the combined  effect of the
Federal  Reserve's  decision  to lower  interest  rates as well as  management's
decision  to  reduce  its cost of funds by  prepaying  Federal  Home  Loan  Bank
advances.  The average rate paid on  interest-bearing  deposits in 2002 and 2001
was 3.45% and 4.95%,  respectively.  The effect of these changes was to decrease
the interest  expense on  interest-bearing  deposits to $9,352,768 in 2002, from
$11,294,581 in 2001, a decrease of $1,941,813 or 17.2%.

Noninterest Income

     Noninterest  income for 2002 and 2001 totaled  $2,937,144  and  $2,411,428,
respectively.  These amounts are primarily from customer service fees, insurance
commissions and fees on services to customers.

Noninterest Expenses

     Noninterest  expenses  totaled  $9,702,148 in 2002 and  $7,831,363 in 2001.
Salaries and benefits  increased  $1,017,972 or 26.5% to $4,854,905 in 2002, due
to the Company's decision to strengthen its management in anticipation of future
growth as well as the  opening  of a branch in Blue  Ridge,  Georgia.  Occupancy
expenses totaled $615,826,  an increase of $104,016 or 20.3% over the 2001 total
of $511,810.  Furniture and equipment  expenses  increased $464,265 or 101.5% in
2002, due to the opening of the branch in Blue Ridge,  Georgia.  Other operating
expenses  increased  $284,532 or 9.4% to $3,309,846  in 2002,  due mainly to the
opening of the branch in Blue Ridge,  Georgia as well as the Company's  decision
to exit the service bureau business and cease operations of AIM.

     The table  below  sets forth the  Company's  noninterest  expenses  for the
periods indicated.
<TABLE>
<CAPTION>

                                                                                       Years ended December 31,
                                                                                     ---------------------------
                                                                                        2002             2001
                                                                                     -----------     -----------
                                                                                        (Amounts in thousands)

<S>                                                                                  <C>             <C>
Salaries and employee benefits....................................................   $     4,756     $     3,744
Furniture and equipment expense...................................................           922             457
Professional and regulatory fees..................................................           676             469
Occupancy expense.................................................................           616             512
Advertising.......................................................................           567             441
Director and committee fees.......................................................           405             412
Supplies..........................................................................           308             264
Postage...........................................................................           164             127
Taxes and licenses................................................................           157             132
Data processing...................................................................            84             395
FDIC & state assessments..........................................................            78             163
Correspondent bank charges........................................................            78              84
Amortization expense..............................................................            76             118
Checking account expense..........................................................            60              57
Insurance.........................................................................            46              42
Other.............................................................................           709             414
                                                                                     -----------     -----------
   Total..........................................................................   $     9,702     $     7,831
                                                                                     ===========     ===========
</TABLE>


Income Taxes

     Net operating income of $3,673,948 in 2002 resulted in $1,005,940 of income
tax expense,  which  represents  an income tax rate of 27.4%.  The Company's net
operating  income of  $3,500,686  in 2001  resulted  in  $962,588  of income tax
expense, which represented an income tax rate of 27.5%.

                                       32
<PAGE>


Impact of Inflation and Changing Prices

     A bank's asset and liability structure is substantially different from that
of an industrial  company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on financial
results  depends  upon the  ability of the Bank to react to changes in  interest
rates and by such  reaction to reduce the  inflationary  impact on  performance.
Interest rates do not  necessarily  move in the same  direction,  or at the same
magnitude,  as the prices of other goods and services.  As discussed previously,
management seeks to manage the relationship  between  interest-sensitive  assets
and  liabilities  in order to protect  against wide interest rate  fluctuations,
including those resulting from inflation.

     Various  information shown elsewhere in this Report will assist the Company
in the  understanding  of how well the Bank is  positioned  to react to changing
interest  rates and  inflationary  trends.  In  particular,  the  summary of net
interest  income,  the maturity  distributions,  the composition of the loan and
security  portfolios  and the data on the  interest  sensitivity  of  loans  and
deposits should be considered.

Market Risk

     Market risk is the risk arising  from adverse  changes in the fair value of
financial  instruments  due to a change in interest  rates,  exchange  rates and
equity prices. The Company's primary market risk is interest rate risk.

     The primary  objective of  Asset/Liability  Management of the Company is to
manage  interest  rate risk and achieve  reasonable  stability  in net  interest
income  throughout  interest rate cycles.  This is achieved by  maintaining  the
proper balance of rate sensitive earning assets and rate sensitive  liabilities.
The relationship of rate sensitive earning assets to rate sensitive  liabilities
is the principal factor in projecting the effect that fluctuating interest rates
will have on future net  interest  income.  Rate  sensitive  earning  assets and
interest-bearing  liabilities  are those that can be repriced to current  market
rates  within a  relatively  short time  period.  Management  monitors  the rate
sensitivity of earning assets and  interest-bearing  liabilities over the entire
life of these instruments,  but places particular emphasis on the first year and
through three years.

     The Company has not  experienced a high level of volatility in net interest
income  primarily  because of the relatively large base of core deposits that do
not reprice on a contractual  basis.  These  deposit  products  include  regular
savings,   interest-bearing   transaction  accounts  and  money  market  savings
accounts. Balances for these accounts are reported based on historical repricing
experienced  at each bank.  However,  the rates paid are  typically not directly
related to market  interest  rates,  since  management  has some  discretion  in
adjusting these rates as market rates change.

     The  Company  uses  additional  tools to monitor and manage  interest  rate
sensitivity.  One  of the  primary  tools  is  simulation  analysis.  Simulation
analysis is the  primary  method of  estimating  earnings at risk and capital at
risk under varying interest rate conditions. Simulation analysis is used to test
the sensitivity of the Company's net interest income and shareholders' equity to
both the level of interest  rates and the slope of the yield  curve.  Simulation
analysis  accounts for the expected timing and magnitude of assets and liability
cash flows, as well as the expected timing and magnitude of deposits that do not
reprice on a  contractual  basis.  In  addition,  simulation  analysis  includes
adjustments for the lag between  movements in market interest rates on loans and
interest-bearing deposits. These adjustments are made to reflect more accurately
possible  future cash flows,  repricing  behavior  and  ultimately  net interest
income.  The  estimated  impact on the  Company's  net  interest  income  before
provision for loan loss sensitivity over a one-year time horizon is shown below.
Such  analysis  assumes a sustained  parallel  shift in  interest  rates and the
Company's estimate of how interest-bearing  transaction accounts will reprice in
each scenario.  Actual results will differ from simulated results due to timing,
magnitude  and  frequency  of  interest  rate  changes  and  changes  in  market
conditions and management's strategies, among other factors.

                                       33
<PAGE>

<TABLE>
<CAPTION>

                                                                                           Percentage Increase
                                                                                          (Decrease) in Interest
                                                                                          Income/Expense Given
                                                                                           Interest Rate Shifts
                                                                                       ----------------------------
                                                                                         Down 200         Up 200
                                                                                       Basis Points    Basis Points
                                                                                       ------------    ------------
For the Twelve Months After December 31, 2003

Projected change in:
<S>                                                                                          <C>             <C>
   Interest income..................................................................         (20.40)%        19.28%
   Interest expense.................................................................         (35.54)         48.77

   Net interest income..............................................................         (13.64)          6.12

</TABLE>

Recently Issued Accounting Standards

     In January 2003, the Auditing  Standards Board issued Statement on Auditing
Standards  ("SAS") No. 101,  Auditing Fair Value  Measurements  and Disclosures.
This statement  establishes standards on auditing the measurement and disclosure
of assets, liabilities, and specific components of equity presented or disclosed
at fair  value in  financial  statements.  This SAS is  effective  for audits of
financial  statements  for  periods  beginning  on or after June 15,  2003.  The
adoption  of SAS  No.  101 did  not  have a  material  impact  on the  Company's
consolidated financial statements.

     In April 2003, the Financial  Accounting  Standards  Board ("FASB")  issued
Statement  of Financial  Accounting  Standards  ("SFAS")  No. 149,  Amendment of
Statement 133 on Derivative  Instruments and Hedging Activities.  The provisions
of this  statement are effective  for contracts  entered into or modified  after
June 20, 2003,  and hedging  relationships  designated  after June 30, 2003, and
generally  require that contracts with comparable  characteristics  be accounted
for  similarly.  Except  for  the  provisions  related  to FASB  Statement  133,
Accounting for Derivative Instruments and Hedging Activities,  all provisions of
this statement should be applied prospectively.  The provisions of the statement
related to Statement  133  Implementation  Issues that have been  effective  for
fiscal quarters that begin prior to June 15, 2003, should continue to be applied
in  accordance  with their  respective  effective  dates.  The  adoption  of the
provisions  of this  statement  did not have a material  effect on the Company's
operating results or financial position.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with  Characteristics of both Liabilities and Equity. This statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires  liability  treatment  for  certain  financial  instruments  which  had
previously  been  recognized as equity.  The  provisions  of this  statement are
effective for financial instruments entered into or modified after May 31, 2003,
and  otherwise  are  effective  at the  beginning  of the first  interim  period
beginning  after  June  15,  2003.  It is to be  implemented  by  reporting  the
cumulative effect of a change in accounting principle for financial  instruments
created  before May 15, 2003, and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. The adoption of the provisions
of this  statement  did not have a material  effect on the  Company's  operating
results or financial position.

     In  December  2003,  the FASB  revised  previously  issued  SFAS  No.  132,
Employers'  Disclosures about Pensions and Other Postretirement.  This statement
revises  employers'  disclosures  about pension  plans and other  postretirement
benefit plans.  It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, Employers' Accounting for Pensions,  No. 88,
Employers'  Accounting  for  Settlements  and  Curtailments  of Defined  Benefit
Pension Plans and for Termination  Benefits,  and No 106, Employers'  Accounting
for  Postretirement  Benefits  Other Than Pensions.  This statement  retains the
disclosure   requirements  contained  in  FASB  Statement  No.  132,  Employers'
Disclosures about Pensions and Other Postretirement Benefits, which it replaces.
It requires additional  disclosures to those in the original Statement 132 about
the assets,  obligations,  cash flows,  and net periodic benefit cost of defined
benefit  pension  plans and other  defined  benefit  postretirement  plans.  The
required  information  should be provided  separately  for pension plans and for
other  postretirement  benefit  plans.  The  provisions  of this  statement  are
effective for financial  statements  with fiscal years ending after December 15,
3003. The  interim-period  disclosures  required by this statement are effective
for interim  periods  beginning  after  December 15,  2003.  The adoption of the
provisions  of this  revised  statement  did not have a  material  effect on the
Company's operating results or financial position.

     In December 2003, the FASB revised previously issued FIN 46,  Consolidation
of Variable  Interest  Entities,  which  clarifies the application of Accounting
Research  Bulletin ("ARB") 51,  Consolidated  Financial  Statements,  to certain
entities  (called variable  interest  entities) in which equity investors do not
have the  characteristics  of a  controlling  financial  interest or do not have

                                       34
<PAGE>

sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated financial support from other parties. The reporting and
disclosure  requirements of this  Interpretation are effective for all financial
statements of public  companies  for the first period ending after  December 15,
2003 and for all other types of  entities  for  periods  ending  after March 15,
2004. The adoption of this  interpretation did not have a material impact on the
Company's consolidated financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Information in response to this Item 7A is  incorporated  by reference from
the  following  sections of Item 7 of this report:  "Interest  Rate  Sensitivity
Management" and "Market Risk."


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated  financial  statements and supplementary  data required by
Regulation  S-X and by Item 302 of  Regulation  S-K are set  forth in the  pages
below.


<TABLE>
<CAPTION>

APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Financial Statements

                                                                                                            Page(s)

<S>                                                                                                              <C>
Independent Auditors' Report................................................................................     36

Consolidated Statements of Financial Condition as of December 31, 2003 and 2002.............................     37

Consolidated Statements of Income for the Years Ended
  December 31, 2003, 2002 and 2001..........................................................................     38

Consolidated Statements of Shareholders' Equity for the Years Ended
  December 31, 2003, 2002 and 2001..........................................................................     39

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2003, 2002 and 2001..........................................................................     40

Notes to Consolidated Financial Statements..................................................................     41

Quarterly Results (Unaudited)...............................................................................     69

</TABLE>

                                       35
<PAGE>




                  Schauer Taylor Cox Vise Morgan & Fowler, P.C.
                  Certified Public Accountants and Consultants
                               150 Olde Towne Road
                            Birmingham, Alabama 35216

Douglas B. Schauer, CPA        Donald G. Vise, CPA           Dale E. Fowler, CPA
Edward R. Taylor, CPA        Phillip D. Morgan, CPA         Steven W. Brown, CPA
W. Ernest Cox, CPA                                         Steven D. Miller, CPA
     _____________                  * * *                       ______________

Michael Bryant, CPA          Telephone - 205.822.3488      Russell D. Payne, CPA
M. Bryant King, CPA            Wats - 800.466.3488        Stewart T. Wilson, CPA
                               Fax - 205.822.3541
                         Email - Firm@schauertaylor.com




                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
Appalachian Bancshares, Inc. and Subsidiaries
Ellijay, Georgia

We have audited the accompanying  consolidated statements of financial condition
of Appalachian  Bancshares,  Inc. (a Georgia corporation) and subsidiaries as of
December 31, 2003 and 2002, and the related  consolidated  statements of income,
shareholders'  equity and cash  flows for each of the three  years in the period
ended  December  31,  2003.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall  consolidated  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Appalachian Bancshares,  Inc. and subsidiaries as of December 31, 2003 and 2002,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended  December 31, 2003,  in  conformity  with
accounting principles generally accepted in the United States of America.

As  described  in Note 1,  these  consolidated  financial  statements  have been
revised to  include  the  transitional  disclosures  required  by  Statement  of
Financial  Accounting  Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, which was adopted by the Company as of January 1, 2002.


Birmingham, Alabama
February 3, 2004
                               /s/ Schauer Taylor Cox Vise Morgan & Fowler, P.C.


                              Registrant of PCAOB
                            Member of AICPA & ASCPA

                                       36
<PAGE>





<TABLE>
<CAPTION>

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           December 31, 2003 and 2002


                                                                                      2003               2002
                                                                                 ---------------   ----------------
Assets
<S>                                                                              <C>               <C>
   Cash and due from banks...................................................    $     6,530,984   $     14,701,857
   Interest-bearing deposits with other banks................................            273,841          8,398,840
   Federal funds sold........................................................            586,000          7,756,000
                                                                                 ---------------   ----------------
       Cash and Cash Equivalents.............................................          7,390,825         30,856,697

   Securities available-for-sale.............................................         55,363,327         40,374,902

   Loans, net of unearned income.............................................        332,306,446        298,063,055
   Allowance for loan losses.................................................         (3,609,794)        (3,237,898)
                                                                                 ---------------   ----------------
       Net Loans.............................................................        328,696,652        294,825,157

   Premises and equipment, net...............................................          9,161,652          8,771,352
   Accrued interest..........................................................          2,289,994          2,240,920
   Cash surrender value on life insurance....................................          2,592,416          2,483,243
   Intangibles, net..........................................................          2,157,433          2,081,264
   Other assets..............................................................          1,965,179          2,390,550
                                                                                 ---------------   ----------------
       Total Assets..........................................................    $   409,617,478   $    384,024,085
                                                                                 ===============   ================

Liabilities and Shareholders' Equity
Liabilities
   Deposits
     Noninterest-bearing.....................................................    $    23,795,787   $     21,897,058
     Interest-bearing........................................................        309,123,161        294,385,698
                                                                                 ---------------   ----------------
       Total Deposits........................................................        332,918,948        316,282,756

   Short-term borrowings.....................................................          7,085,992          5,928,624
   Accrued interest..........................................................            670,614            976,156
   Long-term debt............................................................         30,692,858         34,735,714
   Subordinated long-term capital notes......................................          6,186,000                 --
   Other liabilities.........................................................            980,713            481,546
                                                                                 ---------------   ----------------
       Total Liabilities.....................................................        378,535,125        358,404,796
                                                                                 ---------------   ----------------

Shareholders' Equity
   Preferred stock, 20,000,000 shares authorized, none issued................                 --                 --
   Common stock, par value $0.01 per share, 20,000,000 shares authorized,
     3,734,686 shares issued in 2003 and 3,639,821 shares issued in 2002.....             37,347             36,398
   Paid-in capital...........................................................         22,727,208         21,115,556
   Retained earnings.........................................................          8,588,160          5,805,986
   Accumulated other comprehensive income: net unrealized holding
     gains (losses) on securities available-for-sale, net of deferred income
     tax.....................................................................            429,434            449,050
   Treasury stock, 75,973 and 200,553 shares at cost.........................           (699,796)        (1,787,701)
                                                                                 ---------------   ----------------
       Total Shareholders' Equity............................................         31,082,353         25,619,289
                                                                                 ---------------   ----------------

Total Liabilities and Shareholders' Equity...................................    $   409,617,478   $    384,024,085
                                                                                 ===============   ================
</TABLE>


                See notes to consolidated financial statemeents
                                       37
<PAGE>





<TABLE>
<CAPTION>

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  Years Ended December 31, 2003, 2002 and 2001


                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------
Interest Income
<S>                                                           <C>                <C>               <C>
   Interest and fees on loans..............................   $    21,163,875    $    20,363,641   $     21,238,058
   Interest on investment securities:
     Taxable securities....................................         1,058,688          1,646,592          1,743,440
     Nontaxable securities.................................           706,115            790,127            536,689
   Interest on deposits in other banks.....................            30,224             13,039              4,891
   Interest on federal funds sold..........................            37,362             78,941            366,870
                                                              ---------------    ---------------   ----------------
       Total Interest Income...............................        22,996,264         22,892,340         23,889,948
                                                              ---------------    ---------------   ----------------

Interest Expense
   Interest on deposits....................................         6,959,433          9,352,768         11,294,581
   Interest on federal funds purchased and securities sold
     under agreements to repurchase........................            82,722             76,968            100,124
   Interest on long-term debt..............................         1,129,209          1,995,652          2,280,122
   Interest on Subordinated Debentures.....................            85,200                 --                 --
                                                              ---------------    ---------------   ----------------
       Total Interest Expense..............................         8,256,564         11,425,388         13,674,827
                                                              ---------------    ---------------   ----------------

Net Interest Income........................................        14,739,700         11,466,952         10,215,121
   Provision for loan losses...............................         1,465,000          1,028,000          1,294,500
                                                              ---------------    ---------------   ----------------

Net Interest Income After Provision For Loan Losses........        13,274,700         10,438,952          8,920,621

Noninterest Income
   Customer service fees...................................           844,669          1,058,298            661,715
   Insurance commissions...................................            61,824             77,987             60,665
   Mortgage origination fees...............................         1,276,787          1,049,443          1,063,157
   Other operating income..................................           630,878            465,891            478,915
   Investment securities gains (losses)....................           (16,978)           285,525            146,976
                                                              ---------------    ---------------   ----------------
       Total Noninterest Income............................         2,797,180          2,937,144          2,411,428
                                                              ---------------    ---------------   ----------------

Noninterest Expenses
   Salaries and employee benefits..........................         5,645,790          4,854,905          3,836,933
   Occupancy expense.......................................           980,704            615,826            511,810
   Furniture and equipment expense.........................           631,235            921,571            457,306
   Other operating expenses................................         4,474,256          3,309,846          3,025,314
                                                              ---------------    ---------------   ----------------
       Total Noninterest Expenses..........................        11,731,985          9,702,148          7,831,363
                                                              ---------------    ---------------   ----------------

Income before income taxes.................................         4,339,895          3,673,948          3,500,686
Income tax expense.........................................         1,253,315          1,005,940            962,588
                                                              ---------------    ---------------   ----------------

Net Income.................................................   $     3,086,580    $     2,668,008   $      2,538,098
                                                              ===============    ===============   ================

Earnings Per Common Share
   Basic...................................................   $          0.86    $          0.81   $           0.81
   Diluted.................................................              0.81               0.76               0.75

Cash Dividends Declared Per Common Share...................              0.00               0.00               0.00

Weighted Average Shares Outstanding
   Basic...................................................         3,609,728          3,277,787          3,145,651
   Diluted.................................................         3,809,625          3,508,019          3,389,404

</TABLE>
                 See notes to consolidated financial statements
                                       38
<PAGE>





<TABLE>
<CAPTION>

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  Years Ended December 31, 2003, 2002 and 2001


                                                                                Accumulated
                                                                                   Other
                                                                                  Compre-
                                                                                  hensive
                                         Common       Paid-in       Retained      Income      Treasury
                                          Stock       Capital       Earnings       (Loss)       Stock        Total
                                      -----------  ------------  ------------   ----------   -----------  ------------


<S>                 <C> <C>           <C>          <C>           <C>            <C>          <C>          <C>
Balance at December 31, 2000........  $    31,102  $ 14,606,889  $  5,289,795   $   (3,094)  $(2,255,205) $ 17,669,487

Retroactive effect of 10%
   stock dividend...................        2,882     4,319,623    (4,322,505)          --            --            --
Net income 2001.....................           --            --     2,538,098           --            --     2,538,098
Unrealized gains on available-
   for-sale securities, net of
   reclassification adjustment,
   net of tax of $31,379............           --            --            --       63,916            --        63,916
                                                                                                          ------------
Comprehensive income................           --            --            --           --            --     2,602,014
                                                                                                          ------------
Proceeds from sale of common
   stock to 401(k) plan.............          206       287,102            --           --            --       287,308
Proceeds from exercise of options...           39        32,342            --           --            --        32,381
                                      -----------   -----------  ------------   ----------   -----------  ------------

Balance at December 31, 2001........       34,229    19,245,956     3,505,388       60,822    (2,255,205)   20,591,190

Retroactive effect of 10%
   stock dividend...................          244       367,166      (367,410)          --            --            --
Net income 2002.....................           --            --     2,668,008           --            --     2,668,008
Unrealized gains on available-
   for-sale securities, net of
   reclassification adjustment,
   net of tax of $199,997...........           --            --            --      388,228            --       388,228
                                                                                                          ------------
Comprehensive income................           --            --            --           --            --     3,056,236
                                                                                                          ------------
Proceeds from sale of common
   stock to 401(k) plan.............          117       163,543            --           --            --       163,660
Proceeds from exercise of options...        1,808     1,019,690            --           --            --     1,021,498
Proceeds from issuance of
   treasury stock...................           --       319,201            --           --       467,504       786,705
                                      -----------   -----------  ------------   ----------   -----------  ------------

Balance at December 31, 2002........       36,398    21,115,556     5,805,986      449,050    (1,787,701)   25,619,289

Retroactive effect of 10%
   stock dividend...................          202       302,273      (304,406)          --            --        (1,931)
Net income 2003.....................           --            --     3,086,580           --            --     3,086,580
Unrealized losses on available-
   for-sale securities, net of
   reclassification adjustment,
   net of tax of ($10,107)..........           --            --            --      (19,616)           --       (19,616)
                                                                                                          ------------
Comprehensive income................           --            --            --           --            --     3,066,964
                                                                                                          ------------
Effect of exercise and issuance of
   stock options....................          747       528,583            --           --            --       529,330
Proceeds from issuance of
   treasury stock...................           --       780,796            --           --     1,142,805     1,923,601
Acquisition of treasury stock.......           --            --            --           --       (54,900)      (54,900)
                                      -----------   -----------  ------------   ----------   -----------  ------------

Balance at December 31, 2003........  $    37,347   $22,727,208  $  8,588,160   $  429,434   $  (699,796) $ 31,082,353
                                      ===========  ============  ============   ===========  ============ ============
</TABLE>

                 See notes to consolidated financial statements
                                       39
<PAGE>

<TABLE>
<CAPTION>

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 2003, 2002 and 2001


                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

Operating Activities
<S>                                                           <C>                <C>               <C>
   Net income..............................................   $     3,086,580    $     2,668,008   $      2,538,098
   Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation, amortization, and accretion, net........         1,312,067          1,171,023            861,950
     Provision for loan losses.............................         1,465,000          1,028,000          1,294,500
     Deferred tax benefit..................................           (20,000)           (49,000)          (181,725)
     Realized security (gains) losses, net.................            16,978           (285,525)          (146,976)
     Loss on disposition of other real estate..............            42,143             40,757             47,124
     Increase in cash surrender value on life insurance....          (109,173)          (113,377)          (114,510)
     (Increase) decrease in accrued interest receivable....           (49,074)           258,072            (44,913)
     Decrease in accrued interest payable..................          (305,542)          (290,790)           (94,950)
     Other, net............................................           694,584            (51,421)           183,274
                                                              ---------------    ---------------   ----------------
       Net Cash Provided By Operating Activities...........         6,133,563          4,375,747          4,341,872
                                                              ---------------    ---------------   ----------------

Investing Activities
   Proceeds from sales of premises and equipment...........            27,746                 --                 --
   Proceeds from sales of securities available-for-sale....         5,368,830         12,597,325          7,777,064
   Proceeds from maturity, calls and paydown of
     securities available-for-sale.........................        23,121,518         34,322,603         19,540,135
   Purchase of securities available-for-sale...............       (43,960,542)       (37,442,014)       (44,027,017)
   Net increase in loans to customers......................       (36,321,605)       (49,462,737)       (37,068,598)
   Capital expenditures, net...............................        (1,211,594)        (2,605,882)          (878,572)
   Proceeds from disposition of foreclosed real estate.....         1,248,201            236,615             42,715
                                                              ---------------    ---------------   ----------------
       Net Cash Used In Investing Activities...............       (51,727,446)       (42,354,090)       (54,614,273)
                                                              ---------------    ---------------   ----------------

Financing Activities
   Net increase in demand deposits, NOW accounts,
     and savings accounts..................................         2,458,008         45,209,010         17,041,106
   Net increase in certificates of deposit.................        14,178,184          7,045,739         32,818,078
   Net increase in short-term borrowings...................         1,157,368          2,263,925            819,344
   Issuance of long-term debt..............................        33,736,000         23,000,000                 --
   Repayment of long-term debt.............................       (31,592,858)       (17,917,857)        (4,884,524)
   Issuance of common stock................................           302,800            889,260            319,689
   Sale of treasury stock..................................         1,923,601            786,705                 --
   Purchase of treasury stock..............................           (54,900)                --                 --
   Compensation associated with issuance of stock options..            21,739                 --                 --
   Cash in lieu of fractional shares on stock dividend.....            (1,931)                --                 --
                                                              ---------------    ---------------   ----------------
       Net Cash Provided By Financing Activities...........        22,128,011         61,276,782         46,113,693
                                                              ---------------    ---------------   ----------------

Net Increase (Decrease) in Cash and Cash Equivalents.......       (23,465,872)        23,298,439         (4,158,708)

Cash and Cash Equivalents at Beginning of Year.............        30,856,697          7,558,258         11,716,966
                                                              ---------------    ---------------   ----------------

Cash and Cash Equivalents at End of Year...................   $     7,390,825    $    30,856,697   $      7,558,258
                                                              ===============    ===============   ================
</TABLE>


                 See notes to consolidated financial statements
                                       40
<PAGE>


                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001



Note 1 - Summary of Significant Accounting Policies

The  accompanying  consolidated  financial  statements  include the  accounts of
Appalachian  Bancshares,  Inc. (the "Company") (a Georgia  corporation)  and its
wholly-owned   subsidiaries:   Appalachian   Community  Bank  (the  "Bank")  and
Appalachian Information Management,  Inc. ("AIM"). During 2001, the two previous
bank subsidiaries,  Gilmer County Bank and Appalachian  Community Bank (formerly
known as First  National Bank of Union County) were merged.  The surviving  bank
simultaneously  changed its name to Appalachian Community Bank. See Note 2 for a
more  detailed  discussion  of this  business  combination.  AIM was formed as a
wholly-owned  subsidiary  of the Bank.  In August  2002,  management  decided to
discontinue  operations of AIM,  which  operations  ceased on November 12, 2002.
Accordingly,  the Bank  entered  into a data  processing  agreement  with Fiserv
Solutions,  Inc.,  whereby the Bank  outsourced  those data services  previously
provided  in-house by AIM. AIM has ceased offering data  processing  services to
other   institutions;   however,   the  Bank   continues  to  provide   limited,
administrative  services,  formerly  provided  by  AIM,  to  another  bank  on a
subcontract  basis.  Management  anticipates  that the  discontinuance  of AIM's
operations  will not have a  material  effect  on the  Company's  operations  or
financial condition. AIM provided in-house data services to the Bank and offered
data  processing  services to other  institutions  (see Note 3). All significant
intercompany  transactions  and balances have been eliminated in  consolidation.
Unless otherwise indicated herein, the financial results of the Company refer to
the Company and the Bank on a consolidated basis. The Bank provides a full range
of banking  services to individual and corporate  customers in North Georgia and
the surrounding areas.

The Company operates  predominantly in the domestic commercial banking industry.
The  accounting  and  reporting  policies  of the Company  conform to  generally
accepted  accounting  principles  in the United States of America and to general
practice  within  the  banking  industry.  The  following  summarizes  the  most
significant of these policies.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  in the United States of America  requires  management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

The  determination  of the adequacy of the allowance for loan losses is based on
estimates  that are  particularly  susceptible  to  significant  changes  in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans,  management obtains independent appraisals for
significant collateral. While management uses available information to recognize
losses on loans,  further  reductions  in the  carrying  amounts of loans may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process,  periodically review
the estimated  losses on loans.  Such agencies may require the Bank to recognize
additional losses based on their judgments about  information  available to them
at the time of their  examination.  Because of these  factors,  it is reasonably
possible  that the estimated  losses on loans may change  materially in the near
term.  However,  the amount of the change that is reasonably  possible cannot be
estimated.

Securities

Securities  are  classified as either  held-to-maturity,  available-for-sale  or
trading.

Held-to-maturity  securities are securities for which management has the ability
and intent to hold until  maturity.  These  securities  are carried at amortized
cost,  adjusted for  amortization of premiums and accretion of discount,  to the
earlier of the maturity or call date.

                                       41
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001

Note 1 - Summary of Significant Accounting Policies - Continued

Securities available-for-sale represent those securities intended to be held for
an indefinite period of time, including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors. Securities available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.

Securities  carried  in  trading  accounts  are  carried  at market  value  with
unrealized gains and losses reflected in income.

Realized   and   unrealized   gains  and  losses  are  based  on  the   specific
identification method.

Declines in the fair value of individual held-to maturity and available-for-sale
securities  below their cost that are other than temporary result in write-downs
of the individual  securities to their fair value.  The related  write-downs are
included in earnings as realized losses.

The Company has no trading or held-to-maturity securities.

Loans

Loans are  stated at unpaid  principal  balances,  less the  allowance  for loan
losses, net deferred loan fees and unearned discounts.

Unearned  discounts on installment  loans are recognized as income over the term
of the loans using a method that approximates the interest method.

Loan origination and commitment fees, as well as certain origination costs, when
material, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method.

Allowance for Loan Losses

A loan is considered impaired, based on current information and events, if it is
probable  that the Company will be unable to collect the  scheduled  payments of
principal or interest  when due according to the  contractual  terms of the loan
agreement.  Uncollateralized  loans are  measured  for  impairment  based on the
present  value of  expected  future  cash  flows  discounted  at the  historical
effective interest rate, while all  collateral-dependent  loans are measured for
impairment  based  on  the  fair  value  of  the  collateral.   Smaller  balance
homogeneous  loans,  which consist of residential  mortgages and consumer loans,
are evaluated collectively and reserves are established based on historical loss
experience.

The allowance for loan losses is established  through charges to earnings in the
form of a provision  for loan losses.  Increases  and decreases in the allowance
due to changes in the  measurement  of the  impaired  loans are  included in the
provision for loan losses.  Loans  continue to be classified as impaired  unless
they are brought  fully  current and the  collection  of scheduled  interest and
principal is considered probable. When a loan or portion of a loan is determined
to be  uncollectable,  the portion deemed  uncollectable  is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.

Management's  periodic  evaluation  of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to


                                       42
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 1 - Summary of Significant Accounting Policies - Continued

repay, estimated value of any underlying collateral,  and an analysis of current
economic  conditions.  While  management  believes that it has  established  the
allowance in accordance with generally  accepted  accounting  principles and has
taken  into  account  the  views  of its  regulators  and the  current  economic
environment,  there can be no assurance that in the future the Bank's regulators
or its economic environment will not require further increases in the allowance.

Income Recognition on Impaired and Nonaccrual Loans

Loans,  including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of  principal or interest for a period of
more than 90 days, unless such loans are well  collateralized and in the process
of collection.  If a loan or a portion of a loan is classified as doubtful or is
partially  charged off, the loan is generally  classified as  nonaccrual.  Loans
that are on a current  payment  status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.

Loans may be returned to accrual status when all principal and interest  amounts
contractually  due are  reasonably  assured of  repayment  within an  acceptable
period of time, and there is a sustained period of repayment  performance by the
borrower, in accordance with the contractual terms of interest and principal.

While a loan is classified as nonaccrual  and the future  collectability  of the
recorded  loan balance is doubtful,  collections  of interest and  principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future  collectability of the recorded loan balance
is expected,  interest  income may be  recognized  on a cash basis.  In the case
where a nonaccrual loan has been partially charged off,  recognition of interest
on a cash  basis is limited to that  which  would  have been  recognized  on the
recorded loan balance at the  contractual  interest rate.  Receipts in excess of
that amount are recorded as  recoveries  to the  allowance for loan losses until
prior charge offs have been fully  recovered.  Interest  income  recognized on a
cash basis was immaterial for the years ended December 31, 2003, 2002 and 2001.

Premises and Equipment

Land is carried at cost.  Other  premises and equipment are carried at cost, net
of accumulated depreciation. Depreciation is provided generally by straight-line
methods  based  principally  on the  estimated  useful  lives of the  respective
assets.  Maintenance and repairs are expensed as incurred, while major additions
and improvements are capitalized.  Gains and losses on dispositions are included
in current operations.

Foreclosed Real Estate

Foreclosed   real  estate  includes  both  formally   foreclosed   property  and
in-substance  foreclosed property.  In-substance foreclosed properties are those
properties for which the institution has taken physical  possession,  regardless
of whether formal foreclosure proceedings have taken place.

At the time of  foreclosure,  foreclosed real estate is recorded at the lower of
the  carrying  amount  or fair  value  less  cost to  sell,  which  becomes  the
property's new basis. Any write-downs based on the asset's fair value at date of
acquisition  are charged to the  allowance for loan losses.  After  foreclosure,
these assets are carried at the lower of their new cost basis or fair value less
cost to sell.

Costs incurred in maintaining  foreclosed real estate and subsequent adjustments
to the  carrying  amount  of the  property  are  included  in  income  (loss) on
foreclosed real estate.

                                       43
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 1 - Summary of Significant Accounting Policies - Continued

Advertising Costs

The Company's policy is to expense  advertising  costs as incurred.  Advertising
expense  for the years  ended  December  31,  2003,  2002 and 2001  amounted  to
approximately $516,000, $567,000 and $441,000, respectively.

Income Taxes

Income taxes are provided  for the tax effects of the  transactions  reported in
the financial  statements and consist of taxes currently due plus deferred taxes
related  primarily  to  differences  between  the  basis  of  available-for-sale
securities,  allowance  for loan losses,  estimated  losses on  foreclosed  real
estate, and accumulated depreciation for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and  liabilities  are recovered or settled.  Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled.  As changes in
tax laws or rates are enacted,  deferred tax assets and liabilities are adjusted
through the provision for income taxes.  The Company files  consolidated  income
tax returns with its subsidiaries.

Stock-Based Compensation

At December 31, 2003, the Company had a stock-based employee  compensation plan,
which is more fully  described in Note 19. Prior to 2003, the Company  accounted
for this plan under the recognition  and  measurement  provisions of APB No. 25,
Accounting  for Stock  Issued to  Employees,  and the  related  Interpretations.
Accordingly,  no stock-based  compensation cost was included in net earnings for
the years ended  December 31, 2002 and 2001,  as all options  granted under this
plan had an exercise  price equal to the market value of the  underlying  common
stock on the date of grant.  Effective  January 1, 2003, the Company adopted the
fair value recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based  Compensation,  as provided by SFAS
No. 148,  Accounting for  Stock-Based  Compensation - Transition and Disclosure.
SFAS No.  148 allows  for a  prospective  method of  adoption  of SFAS No.  123,
whereby the Company can prospectively account for the current expense of options
granted  during  2003  and  thereafter.  Results  of prior  years  have not been
restated. The following table illustrates the effects on net income and earnings
per share if the fair value  based  method had been  applied to all  outstanding
awards in each period.
<TABLE>
<CAPTION>

                                                                        Years Ended December 31,
                                                     --------------------------------------------------------------
                                                            2003                  2002                  2001
                                                     ------------------    ------------------    ------------------

<S>                                                  <C>                   <C>                   <C>
Net Income, as reported...........................   $        3,086,580    $        2,668,008    $        2,538,098

Add: Stock-based compensation expense
   included in net income, net of related taxes...               21,739                    --                    --
Deduct: Total stock-based employee
   compensation expense determined under
   the fair value method for all awards,
   net of related taxes...........................              (63,350)             (106,367)             (122,515)
                                                     ------------------    ------------------    ------------------

Pro Forma Net Income..............................   $        3,044,969    $        2,561,641    $        2,415,583
                                                     ==================    ==================    ==================

</TABLE>

                                       44
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 1 - Summary of Significant Accounting Policies - Continued
<TABLE>
<CAPTION>

                                                                        Years Ended December 31,
                                                     --------------------------------------------------------------
                                                            2003                  2002                  2001
                                                     ------------------    ------------------    ------------------
   Basic Earnings per Common Share
<S>                                                  <C>                   <C>                   <C>
     As reported..................................   $             0.86    $             0.81    $             0.81
     Pro Forma....................................                 0.84                  0.78                  0.77

   Diluted Earnings per Common Share
     As reported..................................                 0.81                  0.76                  0.75
     Pro Forma....................................                 0.80                  0.73                  0.71

   Weighted average fair value of options
     granted during the year......................                 4.20                    --                  4.18

   Assumptions:
     Average risk free interest rate..............                 4.95%                   --                  4.95%
     Average expected volatility..................                22.53                    --                 24.20
     Expected dividend yield......................                 1.90                    --                  1.90
     Expected life................................            7.5 years                    --             7.5 years
</TABLE>

The  effects of applying  SFAS No. 123 as amended by SFAS No. 148 for  providing
proforma  disclosures  are not  likely to be  representative  of the  effects on
reported   earnings  for  future   years,   nor  are  the   dividend   estimates
representative of commitments on the part of the Company's Board.

Employee Benefit Plan

The Company has a 401(k)  profit-sharing plan covering  substantially all of its
employees. Eligible participating employees may elect to contribute tax-deferred
contributions.  Company contributions to the plan are determined by the board of
directors.

Intangibles

Intangibles  consist primarily of goodwill,  debt issuance costs, and noncompete
agreements. The goodwill intangible represents a premium paid on the purchase of
assets and deposit liabilities.  The asset is stated at cost, net of accumulated
amortization,  which  was  provided  using  the  straight-line  method  over the
estimated  useful life of 20 years,  until the  Financial  Accounting  Standards
Board (the "FASB") issued SFAS No. 142, Goodwill and Other Intangible Assets, in
June 2001.  Debt issuance costs  represent costs incurred in the Trust Preferred
transaction which is more fully discussed in Note 13. The noncompete  intangible
represents  an  amount  paid  to  a  former   employee  who  agrees  to  certain
stipulations concerning future employment spelled out in a noncompete agreement.
The asset is stated at cost, net of accumulated amortization,  which is provided
using the straight-line method over the estimated useful life of 2 years.

The adoption of new accounting standards effective January 1, 2002, mandates the
discontinuance of periodic  amortization and requires the Company to measure the
recorded  goodwill for  impairment as of January 1, 2002,  and at least annually
thereafter.  The initial assessment of the Company's intangible asset (Goodwill)
as of January 1, 2002,  and the annual  assessments  as of December 31, 2003 and
2002, indicate that no impairment of values existed at those dates.


                                       45
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 1 - Summary of Significant Accounting Policies - Continued

Off Balance Sheet Financial Instruments

In  the   ordinary   course  of  business   the   Company   has   entered   into
off-balance-sheet  financial  instruments  consisting of  commitments  to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby  letters of credit.  Such financial  instruments are recorded in the
financial  statements when they are funded. See Note 17 for a further discussion
of these financial instruments.

The Company also has available as a source of short-term  financing the purchase
of federal funds from other commercial banks from an available line of up to $21
million  and a  line  of  credit  with  the  Federal  Home  Loan  Bank  of up to
approximately  $61,360,000 of which $30,600,000 is available and unused, subject
to proper collateralization.

Segment Information

All of the Company's offices offer similar products and services, are located in
the same geographic  region, and serve the same customer segments of the market.
As a  result,  management  considers  all  units as one  operating  segment  and
therefore  feels that the basic  consolidated  financial  statements and related
footnotes provide details related to segment reporting.

Reclassifications

Certain amounts in 2002 and 2001 have been reclassified to conform with the 2003
presentation.

Recently Issued Accounting Standards

In January  2003,  the Auditing  Standards  Board  issued  Statement on Auditing
Standards  ("SAS") No. 101,  Auditing Fair Value  Measurements  and Disclosures.
This statement  establishes standards on auditing the measurement and disclosure
of assets, liabilities, and specific components of equity presented or disclosed
at fair  value in  financial  statements.  This SAS is  effective  for audits of
financial  statements  for  periods  beginning  on or after June 15,  2003.  The
adoption  of SAS  No.  101 did  not  have a  material  impact  on the  Company's
consolidated financial statements.

In April  2003,  the FASB issued SFAS No. 149,  Amendment  of  Statement  133 on
Derivative Instruments and Hedging Activities.  The provisions of this statement
are effective for contracts  entered into or modified  after June 20, 2003,  and
hedging relationships designated after June 30, 2003, and generally require that
contracts with comparable characteristics be accounted for similarly. Except for
the  provisions  related  to  FASB  Statement  133,  Accounting  for  Derivative
Instruments and Hedging  Activities,  all provisions of this statement should be
applied prospectively.  The provisions of the statement related to Statement 133
Implementation  Issues that have been  effective for fiscal  quarters that begin
prior to June 15, 2003,  should  continue to be applied in accordance with their
respective effective dates. The adoption of the provisions of this statement did
not have a material  effect on the  Company's  operating  results  or  financial
position.

In May 2003,  the FASB  issued SFAS No. 150,  Accounting  for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity. This statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires  liability  treatment  for  certain  financial  instruments  which  had
previously  been  recognized as equity.  The  provisions  of this  statement are
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise are effective at the beginning of


                                       46
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 1 - Summary of Significant Accounting Policies - Continued

the first interim period  beginning after June 15, 2003. It is to be implemented
by reporting  the  cumulative  effect of a change in  accounting  principle  for
financial  instruments  created  before May 15, 2003,  and still existing at the
beginning of the interim period of adoption.  Restatement is not permitted.  The
adoption of the provisions of this  statement did not have a material  effect on
the Company's operating results or financial position.

In December 2003, the FASB revised  previously  issued SFAS No. 132,  Employers'
Disclosures  about Pensions and Other  Postretirement.  This  statement  revises
employers'  disclosures  about  pension plans and other  postretirement  benefit
plans. It does not change the measurement or recognition of those plans required
by  FASB  Statements  No.  87,  Employers'  Accounting  for  Pensions,  No.  88,
Employers'  Accounting  for  Settlements  and  Curtailments  of Defined  Benefit
Pension Plans and for Termination  Benefits,  and No 106, Employers'  Accounting
for  Postretirement  Benefits  Other Than Pensions.  This statement  retains the
disclosure   requirements  contained  in  FASB  Statement  No.  132,  Employers'
Disclosures about Pensions and Other Postretirement Benefits, which it replaces.
It requires additional  disclosures to those in the original Statement 132 about
the assets,  obligations,  cash flows,  and net periodic benefit cost of defined
benefit  pension  plans and other  defined  benefit  postretirement  plans.  The
required  information  should be provided  separately  for pension plans and for
other  postretirement  benefit  plans.  The  provisions  of this  statement  are
effective for financial  statements  with fiscal years ending after December 15,
2003. The  interim-period  disclosures  required by this statement are effective
for interim  periods  beginning  after  December 15,  2003.  The adoption of the
provisions  of this  revised  statement  did not have a  material  effect on the
Company's operating results or financial position.

In December 2003, the FASB revised  previously  issued FIN 46,  Consolidation of
Variable  Interest  Entities,  which  clarifies  the  application  of Accounting
Research  Bulletin ("ARB") 51,  Consolidated  Financial  Statements,  to certain
entities  (called variable  interest  entities) in which equity investors do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated financial support from other parties. The reporting and
disclosure  requirements of this  Interpretation are effective for all financial
statements of public  companies  for the first period ending after  December 15,
2003 and for all other types of  entities  for  periods  ending  after March 15,
2004. The adoption of this  interpretation did not have a material impact on the
Company's consolidated financial statements.

Earnings per Common Share

Basic earnings per common share are computed by dividing  earnings  available to
stockholders by the weighted average number of common shares  outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive  potential common stock had been converted to common stock,
as prescribed  by SFAS No. 128,  Earnings per Share.  In July 2003,  the Company
issued  a  10%  stock  dividend.   All  per  share  amounts  included  in  these
consolidated  financial  statements  have been  retroactively  adjusted  to give
effect to this dividend. The following reconciles the weighted average number of
shares outstanding:
<TABLE>
<CAPTION>

                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

<S>                                                                 <C>                <C>                <C>
Weighted average of common shares outstanding..............         3,609,728          3,277,787          3,145,651
Effect of dilutive options.................................           199,897            230,232            243,753
                                                              ---------------    ---------------   ----------------
Weighted average of common shares outstanding
   effected for dilution...................................         3,809,625          3,508,019          3,389,404
                                                              ===============    ===============   ================
</TABLE>

                                       47
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 1 - Summary of Significant Accounting Policies - Continued

Comprehensive Income

Comprehensive  income is generally defined as the change in equity of a business
enterprise  during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those  resulting  from  investments  by  owners  and  distributions  to  owners.
Comprehensive  income is the total of net income and all other non-owner changes
in  equity.  Items  that are to be  recognized  under  accounting  standards  as
components of comprehensive  income are displayed in statements of shareholders'
equity.

In the calculation of comprehensive income, certain reclassification adjustments
are made to avoid double counting items that are displayed as part of net income
for a period that also had been displayed as part of other comprehensive  income
in that  period or  earlier  periods.  The  disclosure  of the  reclassification
amounts and other details of other comprehensive income are as follows:
<TABLE>
<CAPTION>

                                                                            Years Ended December 31,
                                                              -----------------------------------------------------
                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

Unrealized gains (losses) on securities

<S>                                                           <C>                <C>               <C>
   Unrealized holding gains arising during period...........  $       (46,701)   $       873,750   $        242,271
   Reclassification adjustments for (gains) losses
     included in net income.................................           16,978           (285,525)          (146,976)
                                                              ---------------    ---------------   ----------------
   Net unrealized gains(losses).............................          (29,723)           588,225             95,295
   Income tax related to items of other
     comprehensive income...................................           10,107           (199,997)           (31,379)
                                                              ---------------    ---------------   ----------------

Other comprehensive income (loss)...........................  $       (19,616)   $       388,228   $         63,916
                                                              ===============    ===============   ================
</TABLE>

Statements of Cash Flows

The Company  includes cash, due from banks,  and short-term  investments as cash
equivalents  in  preparing  the  consolidated  statements  of  cash  flows.  The
following is  supplemental  disclosure  to the  statements of cash flows for the
three years ended December 31, 2003.
<TABLE>
<CAPTION>

                                                                            Years Ended December 31,
                                                              -----------------------------------------------------
                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

<S>                                                           <C>                <C>               <C>
   Cash paid during the year for interest...................  $     8,562,106    $    11,716,178   $     13,769,777

   Cash paid during the year for income taxes...............          836,039          1,050,345          1,061,461

   Non-cash Disclosures:

   Loans transferred to foreclose real estate...............        1,517,302          1,477,804            732,882

   Net increase (decrease) in unrealized gains and
     losses on securities available-for-sale................          (29,723)           588,225             95,295

   Proceeds from sales of foreclosed real estate
     financed through loans.................................          532,192            294,290            619,445

   Tax benefit of the exercise of non qualified options.....          204,791            295,898             15,981
</TABLE>


                                       48
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 2 - Business Combination

Effective August 13, 2001, the Company's wholly-owned bank subsidiaries,  Gilmer
County Bank and Appalachian  Community Bank,  were merged  together.  Regulatory
approval  for the merger was  received by the Company  from the Federal  Deposit
Insurance  Corporation  ("FDIC")  and the  Georgia  Department  of  Banking  and
Finance.  Pursuant to the merger,  Gilmer County Bank, as the surviving  bank in
the  merger,  changed  its legal name from  Gilmer  County  Bank to  Appalachian
Community  Bank.  However,  its  offices  located in Gilmer  County  continue to
operate under the trade name of "Gilmer County Bank."


Note 3 - Discontinued Operations

In  August  2002,  the  Company  announced  its  intentions  to  close  down the
operations of its subsidiary,  Appalachian Information Management, Inc. ("AIM").
The operations of AIM ceased on November 12, 2002.

Disposition  of the assets of the  discontinued  operations  began in  September
2002. At December 31, 2003,  the remaining  assets  (primarily  fixed assets and
prepaid  expenses) net of related reserves and other liabilities are included in
premises  and  equipment  and  other  assets  in the  accompanying  consolidated
statement of financial condition and continue to be held for productive use.

An impairment loss of approximately $43,000 was recognized by the Company in the
year 2002 related to this discontinued function.

In light of the Company discontinuing the operations of AIM, its data processing
provider,  the Company signed a 5-year contract with Fiserv  Solutions,  Inc. to
provide the Company with data processing services vacated by the closure of AIM.
The  contract  contains a 3-year  renewable  option  along  with a detailed  fee
schedule for the different services it is likely to perform.



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                                       49
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 4 - Restrictions On Cash and Due From Bank Accounts

The Company is required to maintain  average  reserve  balances  either in vault
cash or on deposit with the Federal Reserve Bank. At December 31, 2003 and 2002,
the  average  amount of the  required  reserves  was  $302,000  and  $5,742,000,
respectively.


Note 5 - Securities

The carrying  amounts of  securities as shown in the  consolidated  statement of
financial condition of the Company and their approximate fair values at December
31, 2003 and 2002 are presented below.
<TABLE>
<CAPTION>

                                                                           Gross           Gross        Estimated
                                                          Amortized     Unrealized      Unrealized        Fair
                                                            Cost           Gains          Losses          Value
                                                       --------------  -------------  -------------  --------------

Securities Available-for-Sale
-----------------------------

December 31, 2003:
<S>                                                    <C>             <C>            <C>            <C>
   U.S. Government and agency securities............   $   20,273,622  $      69,052  $     268,234  $   20,074,440
   State and municipal securities...................       13,572,237        782,726             --      14,354,963
   Mortgage-backed securities.......................       19,137,512        115,141         48,029      19,204,624
   Equity securities................................        1,729,300             --             --       1,729,300
                                                       --------------  -------------  -------------  --------------
                                                       $   54,712,671  $     966,919  $     316,263  $   55,363,327
                                                       ==============  =============  =============  ==============


December 31, 2002:
   U.S. Government and agency securities............   $    8,481,531  $      97,643  $          --  $    8,579,174
   State and municipal securities...................       14,847,957        466,696            861      15,313,792
   Mortgage-backed securities.......................       14,642,135        133,916         17,015      14,759,036
   Equity securities................................        1,722,900             --             --       1,722,900
                                                       --------------  -------------  -------------  --------------
                                                       $   39,694,523  $     698,255  $      17,876  $   40,374,902
                                                       ==============  =============  =============  ==============
</TABLE>

At December 31, 2003, the Company's available-for-sale  securities reflected net
unrealized  gains of $650,656  that  resulted  in an  increase in  stockholders'
equity of $429,434 net of deferred  tax  liability.  At December  31, 2002,  the
Company's  available-for-sale  securities  reflected  net  unrealized  gains  of
$680,379, which resulted in an increase in stockholders' equity of $449,050, net
of deferred tax liability.



              [The remainder of this page intentionally left blank]


                                       50
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 5 - Securities - Continued

The following table shows the Company's investments' gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous  unrealized loss position,  at December 31,
2003.
<TABLE>
<CAPTION>

                                   Less Than 12 Months           12 Months or More                 Total
                               ---------------------------  --------------------------  ---------------------------
                                                  Gross                        Gross                       Gross
                                    Fair       Unrealized       Fair        Unrealized       Fair        Unrealized
                                    Value        Losses         Value         Losses         Value        Losses
                               -------------   -----------  -------------  -----------  -------------   -----------
Securities Available-for-Sale
-----------------------------

   U.S. Government and
<S>                            <C>             <C>          <C>            <C>          <C>             <C>
     agency securities.......  $  11,485,843   $   268,234  $          --  $        --  $  11,485,843   $   268,234
   Mortgage-backed
     securities..............      5,623,743        48,029             --           --      5,623,743        48,029
                               -------------   -----------  -------------  -----------  -------------   -----------

                               $  17,109,586   $   316,263  $          --  $        --  $  17,109,586   $   316,263
                               =============   ===========  =============  ===========  =============   ===========
</TABLE>

Management  evaluates securities for other-than temporary impairment at least on
a quarterly  basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term  prospects  of the  issuer,  and (3) the  intent  and  ability  of the
Corporation  to  retain  its  investment  in the  issuer  for a  period  of time
sufficient to allow for any anticipated recovery in fair value.

The  contractual  maturities  of securities  available-for-sale  at December 31,
2003, are shown as follows.  Expected  maturities  will differ from  contractual
maturities  because  borrowers may have the right to call or prepay  obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>

                                                                                    Amortized          Estimated
                                                                                      Cost            Fair Value
                                                                                 ---------------   ----------------
Securities Available-for-Sale
-----------------------------
<S>                                                                              <C>               <C>
   Due in one year or less..................................................     $     7,312,256   $      7,362,329
   Due after one year through five years....................................          24,110,911         23,928,477
   Due after five years through ten years...................................           6,619,133          6,753,197
   Due after ten years......................................................          14,941,071         15,590,024
   Equity securities........................................................           1,729,300          1,729,300
                                                                                 ---------------   ----------------

                                                                                 $    54,712,671   $     55,363,327
                                                                                 ===============   ================
</TABLE>

Mortgage-backed  securities have been included in the maturity tables based upon
guaranteed payoff date of each security.

                                       51
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 5 - Securities - Continued

Gross realized gains and losses on the sale of securities available-for-sale for
each of the three years in the period ended December 31, 2003, were as follows:
<TABLE>
<CAPTION>

                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

<S>                                                           <C>                <C>               <C>
Gross realized gains........................................  $        24,243    $       290,227   $        174,983
Gross realized losses.......................................           41,221              4,702             28,007
</TABLE>

Equity  securities  include a  restricted  investment  in Federal Home Loan Bank
stock,  which must be  maintained to secure the  available  line of credit.  The
amount of investment  in this stock  amounted to  $1,543,300  and  $1,722,900 at
December  31, 2003 and 2002,  respectively.  Equity  securities  also include an
investment in Appalachian Capital Trust I. The amount of investment in the trust
amounted to $186,000 and $-0- at December 31, 2003 and 2002, respectively.

The carrying  value of investment  securities  pledged to secure public funds on
deposit,  securities sold under agreements to repurchase, and for other purposes
as required by law  amounted to  approximately  $24,912,754  and  $9,092,000  at
December 31, 2003 and 2002, respectively.


Note 6 - Loans

The Company  grants loans to customers  primarily in the North Georgia area. The
major classifications of loans as of December 31, 2003 and 2002 were as follows:
<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                 ----------------------------------
                                                                                      2003               2002
                                                                                 ---------------   ----------------

<S>                                                                              <C>               <C>
Commercial, financial and agricultural......................................     $    34,613,388   $     33,448,866
Real estate - construction..................................................         104,619,438         73,242,467
Real estate - mortgage......................................................         166,597,728        165,525,831
Consumer....................................................................          20,534,760         20,295,311
Other loans.................................................................           5,941,132          5,550,580
                                                                                 ---------------   ----------------
                                                                                     332,306,446        298,063,055
Allowance for loan losses...................................................          (3,609,794)        (3,237,898)
                                                                                 ---------------   ----------------

Net loans...................................................................     $   328,696,652   $    294,825,157
                                                                                 ===============   ================
</TABLE>

Total loans which the Company considered to be impaired at December 31, 2003 and
2002 were  $1,126,727 and $4,823,000,  respectively.  All of these loans were on
nonaccrual  status  and  had  related   allowances  of  $169,009  and  $723,450,
respectively.  Impaired  loans  consisted  primarily of  commercial  loans as of
December 31, 2003 and 2002.  The average  recorded  investment in impaired loans
for the years ended December 31, 2003 and 2002 was approximately  $2,248,000 and
$3,232,500,  respectively.  No material amount of interest income was recognized
on impaired  loans for the years ended  December 31, 2003 and 2002. For the year
ended December 31, 2003, the difference between gross interest income that would
have been recorded in such period if the  nonaccruing  loans had been current in
accordance  with their original terms and the amount of interest income on those
loans that was included in such period's net income was approximately  $148,000.
In the year ended December 31, 2002, the amount was $425,000.

The Company has no  commitments  to loan  additional  funds to the  borrowers of
nonaccrual loans.

                                       52
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 7 - Allowance for Loan Losses

Changes  in the  allowance  for loan  losses for each of the three  years  ended
December 31, 2003, 2002 and 2001 are as follows:
<TABLE>
<CAPTION>

                                                                                  December 31,
                                                              -----------------------------------------------------
                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

<S>                                                           <C>                <C>               <C>
Balance at beginning of year................................  $     3,237,898    $     2,995,362   $      2,210,603

Charge-offs.................................................       (1,207,788)          (816,701)          (543,800)
Recoveries..................................................          114,684             31,237             34,059
                                                              ---------------    ---------------   ----------------
   Net charge-offs..........................................       (1,093,104)          (785,464)          (509,741)

Provision for loan losses...................................        1,465,000          1,028,000          1,294,500
                                                              ---------------    ---------------   ----------------

Balance at end of year......................................  $     3,609,794    $     3,237,898   $      2,995,362
                                                              ===============    ===============   ================
</TABLE>


Note 8 - Premises and Equipment

Premises and equipment were as follows:
<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                 ----------------------------------
                                                                                      2003               2002
                                                                                 ---------------   ----------------

<S>                                                                              <C>               <C>
Land ......................................................................      $     2,080,417   $      2,080,417
Buildings and improvements..................................................           4,778,078          4,757,454
Furniture and equipment.....................................................           3,514,899          3,498,374
Computer equipment and software.............................................           1,305,985          1,188,018
Automobiles.................................................................             175,524            140,982
Construction in progress....................................................             676,613             43,713
                                                                                 ---------------   ----------------
                                                                                      12,531,516         11,708,958
Allowance for depreciation..................................................          (3,369,864)        (2,937,606)
                                                                                 ---------------   ----------------

                                                                                 $     9,161,652   $      8,771,352
                                                                                 ===============   ================
</TABLE>

The provision for depreciation  charged to occupancy and furniture and equipment
expense for the years  ended  December  31,  2003,  2002 and 2001 was  $784,918,
$679,960 and $640,220, respectively.




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                                       53
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 9 - Intangibles

Acquired  goodwill and other intangible  assets as of December 31, 2003 and 2002
are detailed as follows:
<TABLE>
<CAPTION>

Amortizable Intangibles
                                                                    Gross                                 Net
                                                                  Carrying         Accumulated         Carrying
                                                                   Amount         Amortization          Amount
                                                              ---------------    -------------  -------------------
As of December 31, 2003:

<S>                                                           <C>                <C>               <C>
   Noncompete agreements....................................  $       165,000    $       158,125   $          6,875
   Debt issuance costs......................................          170,000             11,333            158,667
                                                              ---------------    ---------------   ----------------

   Total....................................................  $       335,000    $       169,458   $        165,542
                                                              ===============    ===============   ================

As of December 31, 2002:

   Noncompete agreements....................................  $       165,000    $        75,627   $         89,373
                                                               --------------     --------------    ---------------

   Total....................................................  $       165,000    $        75,627   $         89,373
                                                              ===============    ===============   ================
</TABLE>

Aggregate  amortization expense for amortizable  intangible assets for the years
ended  December  31,  2003 and  2002  was  $93,831  and  $75,627,  respectively.
Estimated annual amortization expense for the following years ending December 31
is as follows:
<TABLE>
<CAPTION>

                                                      2004          2005         2006         2007         2008
                                                   -----------  -----------  -----------  -----------   -----------

<S>                                                <C>          <C>          <C>          <C>           <C>
Estimated annual amortization expense............  $    40,875  $    34,000  $    34,000  $    34,000   $    22,667
</TABLE>

<TABLE>
<CAPTION>

Acquired Goodwill:
                                                                                      2003               2002
                                                                                 ---------------   ----------------

<S>                                                                              <C>               <C>
Goodwill from bank acquisition..............................................     $     1,991,891   $      1,991,891
                                                                                 ===============   ================

</TABLE>



              [The remainder of this page intentionally left blank]


                                       54
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 9 - Intangibles - Continued

The following  table  presents net income and earnings per share as reported and
adjusted  to exclude tax  effected  amortization  of goodwill  that is no longer
being amortized.
<TABLE>
<CAPTION>

                                                                             Years Ended December 31
                                                              -----------------------------------------------------
                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

<S>                                                           <C>                <C>               <C>
Reported Net income.........................................  $     3,086,580    $     2,668,008   $      2,538,098
Add back Goodwill amortization, net of tax..................               --                 --            117,747
                                                              ---------------    ---------------   ----------------

Adjusted net income.........................................  $     3,086,580    $     2,668,008   $      2,655,845
                                                              ===============    ===============   ================

Basic earnings per share:
     Reported net income....................................  $          0.86    $          0.81   $          0.81
     Goodwill amortization..................................             0.00               0.00              0.03
                                                              ---------------    ---------------   ---------------

     Adjusted net income....................................  $          0.86    $          0.81   $          0.84
                                                              ===============    ===============   ===============

Diluted earnings per share:
     Reported net income....................................  $          0.81    $          0.76   $          0.75
     Goodwill amortization..................................             0.00               0.00              0.03
                                                              ---------------    ---------------   ---------------

     Adjusted net income....................................  $          0.81    $          0.76   $          0.78
                                                              ===============    ===============   ===============
</TABLE>


Note 10 - Deposits

The  aggregate  amounts  of  time  deposits  of  $100,000  or  more,   including
certificates  of deposit of $100,000 or more at December  31, 2003 and 2002 were
$86,556,043 and $60,533,038,  respectively.  Time deposits of less than $100,000
totaled   $98,250,531   and   $110,095,352   at  December  31,  2003  and  2002,
respectively.  Demand deposits  reclassified as loan balances as of December 31,
2003 and 2002 amounted to $117,253 and $60,286, respectively.

The maturities of time certificates of deposit and other time deposits issued by
the Company at December 31, 2003, are as follows:
<TABLE>
<CAPTION>

                                                                                                         Time
                                                                                                     Certificates
                                                                                                       of Deposit
                                                                                                   ----------------
           Years ending December 31,
           -------------------------
<S>                   <C>                                                                          <C>
                      2004......................................................................   $    134,770,727
                      2005......................................................................         36,952,176
                      2006......................................................................          7,586,228
                      2007......................................................................          5,196,944
                      2008......................................................................            300,499
                                                                                                   ----------------

                                                                                                   $    184,806,574
                                                                                                   ================
</TABLE>


                                       55
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 11 - Short-term Borrowings

Short-term borrowings at December 31, 2003 and 2002 consist of the following:
<TABLE>
<CAPTION>

                                                                                      2003               2002
                                                                                 ---------------   ----------------

<S>                                                                              <C>               <C>
Federal funds purchased.....................................................     $     3,000,000   $             --
Securities sold under agreements to repurchase..............................           4,085,992          5,928,624
                                                                                 ---------------   ----------------

                                                                                 $     7,085,992   $      5,928,624
                                                                                 ===============   ================
</TABLE>

Securities  sold under  agreements to repurchase  are reflected at the amount of
cash  received  in  connection  with  the  transaction.  Information  concerning
securities sold under agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>

                                                                                      2003               2002
                                                                                 ---------------   ----------------

<S>                                                                              <C>               <C>
Average balance during the year.............................................     $     5,488,443   $      4,061,294
Average interest rate during the year.......................................                1.23%             1.60%
Maximum month-end balance during the year...................................     $     8,211,269   $      5,928,624
</TABLE>


U.S. Agency, municipal and mortgage-backed  securities underlying the agreements
at year end:
<TABLE>

<S>                                                                              <C>               <C>
Carrying value..............................................................     $     5,887,249   $      6,106,585
Estimated fair value........................................................           5,887,249          6,106,585
</TABLE>


Note 12 - Long-term Debt

At  December  31,  2003  and  2002,  the  Company  had  notes  payable  totaling
$30,692,858 and $34,735,714, respectively.

Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>

                                                                                      2003               2002
                                                                                 ---------------   ----------------

Notes  payable on line of credit at FHLB, with varying maturities; from
March 2004 through September 2012, interest rate varies from 0.72% to 7.74%,
<S>                                                                              <C>               <C>
secured by residential mortgages...............................................  $    30,692,858   $     30,135,714

Note  payable to another  financial  institution, interest at prime less
0.25%; interest paid quarterly with principal payments of $657,000 to be
made annually,  secured by 100% of the outstanding shares of Appalachian
Community Bank................................................................                --          4,600,000
                                                                                 ---------------   ----------------

                                                                                 $    30,692,858   $     34,735,714
                                                                                 ===============   ================
</TABLE>

                                       56
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 12 - Long-term Debt - Continued

Maturities of long-term debt following December 31, 2003 are as follows:
<TABLE>
<CAPTION>

           Years ending December 31,
           -------------------------
<S>                   <C>                                                                          <C>
                      2004......................................................................   $      7,242,858
                      2005......................................................................          6,200,000
                      2006......................................................................          6,200,000
                      2007......................................................................            700,000
                      2008......................................................................          5,350,000
                      Thereafter................................................................          5,000,000
                                                                                                   ----------------
                                                                                                   $     30,692,858
                                                                                                   ================
</TABLE>


Note 13 - Subordinated Long-term Capital Notes

On August  28,  2003,  Appalachian  Capital  Trust I ("the  Trust"),  a Delaware
statutory trust established by the Company, received $6,000,000 principal amount
of the Trust's floating rate cumulative  trust preferred  securities (the "Trust
Preferred  Securities") in a trust preferred private placement.  The proceeds of
that  transaction  were then used by the Trust to  purchase  an equal  amount of
floating  rate-subordinated  debentures (the  "Subordinated  Debentures") of the
Company. The Company has fully and unconditionally guaranteed all obligations of
the  Trust  on  a  subordinated  basis  with  respect  to  the  Trust  Preferred
Securities.  In accordance with the provisions of Financial  Interpretation  No.
46, the Company accounts for the Trust Preferred  Securities as a long-term debt
liability  to  the  Trust  in the  amount  of  $6,186,000.  Subject  to  certain
limitations, the Trust Preferred Securities qualify as Tier 1 capital.

The  sole  asset of the  Trust  is the  Subordinated  Debentures  issued  by the
Company.  Both the Trust Preferred  Securities and the  Subordinated  Debentures
have approximately  30-year lives.  However, both the Company and the Trust have
options  to call  their  respective  securities  after  five  years,  subject to
regulatory capital requirements.


Note 14 - Shareholders' Equity

At December 31, 2003 and 2002,  shareholders' equity of the Company consisted of
the following:

Preferred Stock: At December 31, 2003, 20,000,000 shares authorized, none issued
and none outstanding.

Common Stock:  At December 31, 2003,  20,000,000  shares  authorized,  3,734,686
shares issued and 3,658,713  outstanding with a par value of $0.01 per share. At
December 31, 2002,  20,000,000  shares  authorized,  3,639,821 shares issued and
3,439,268  outstanding with a par value of $0.01 per share.  Voting rights equal
to one vote per share.

Paid-in  Capital:  Represents the funds received in excess of par value upon the
issuance of stock,  net of issuance costs and the tax benefits of  non-statutory
stock options.

Retained  Earnings:  Represents  the  accumulated  net  earnings of the Company.

Accumulated Other Comprehensive  Income (Loss):  Represents the change in equity
during each period from the effects of  unrealized  holding  gains and losses on
securities available-for-sale, net of tax.

                                       57
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 14 - Shareholders' Equity - Continued

Treasury Stock: Represents 75,973 and 200,533 shares of common stock at December
31, 2003 and 2002, at cost.

In 2003,  the Company  purchased  3,660 shares of its common stock for a cost of
$54,900,  which were added to  treasury  stock at cost.  The  Company  also sold
128,240 shares of its treasury stock for $1,923,601. In addition, 82,170 options
were exercised for an amount  equaling  $529,330,  including tax benefit.  A 10%
stock dividend of 332,826 shares was also issued in 2003.

In 2002,  the  Company  issued  12,859  shares of stock to its  401(k)  Plan for
$163,660.  The  Company  also  sold  52,447  shares  of its  treasury  stock for
$786,705.  In addition,  198,880  options were exercised for an amount  equaling
$1,021,498, including tax benefit.

In 2001,  the  Company  sold  22,575  shares  of stock  to its  401(k)  plan for
$287,308.  In addition,  4,290  options were  exercised  for an amount  equaling
$32,381, including tax benefit.

The Company is required  to maintain  minimum  amounts of capital to total "risk
weighted" assets, as defined by the banking regulators.  The Company's ratios as
of December  31, 2003 and 2002 are  disclosed  in the  regulatory  matters  note
following.

The board of  directors of any  state-chartered  bank in Georgia may declare and
pay cash  dividends on its  outstanding  capital  stock  without any request for
approval of the Bank's regulatory agency if the following conditions are met:

1.   Total classified  assets at the most recent  examination of the Bank do not
     exceed 80% of equity capital.

2.   The  aggregate  amount of dividends  declared in the calendar year does not
     exceed 50% of the prior year's net income.

3.   The ratio of equity capital to adjusted assets shall not be less than 6%.

As of December  31, 2003,  the Bank could  declare  dividends  of  approximately
$1,819,000  without  regulatory  consent,  subject to the Bank's compliance with
regulatory capital restrictions. It is anticipated that any such dividends would
be used for the payment of long-term debt service.



              [The remainder of this page intentionally left blank]


                                       58
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 15 - Other Operating Expenses

Other operating expenses consist of the following:
<TABLE>
<CAPTION>

                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

<S>                                                           <C>                <C>               <C>
Professional fees..........................................   $       948,335    $       675,728   $        469,267
Data processing............................................           569,915             83,572            395,270
Advertising................................................           516,036            566,684            440,651
Stationery and supplies....................................           337,712            307,937            264,271
Director and committee fees................................           314,500            306,282            318,720
Taxes and licenses.........................................           275,528            157,459            132,472
Education..................................................           196,231             95,107             37,386
FDIC and state assessments.................................           178,917             77,503            163,421
Postage....................................................           150,268            163,746            126,668
Amortization...............................................            93,833             75,624            117,747
Correspondent bank charges.................................            90,461             77,829             84,294
Insurance..................................................            47,465             45,997             42,463
Checking account expense...................................            41,311             60,286             56,805
Dues and subscriptions.....................................            40,403             45,594             39,546
Other......................................................           673,341            570,498            336,333
                                                              ---------------    ---------------   ----------------

   Total other operating expenses..........................   $     4,474,256    $     3,309,846   $      3,025,314
                                                              ===============    ===============   ================
</TABLE>


Note 16 - Income Taxes

Federal and state income taxes receivable (payable) as of December 31, 2003 and
2002 included in other assets and other liabilities were as follows:
<TABLE>
<CAPTION>

                                                                                      2003               2002
                                                                                 ---------------   ----------------
Current
<S>                                                                              <C>               <C>
   Federal..................................................................     $       151,850   $        328,516
   State....................................................................             (89,939)           (34,120)
</TABLE>

The components of the net deferred income tax asset included in other assets are
as follows:
<TABLE>
<CAPTION>

                                                                                      2003               2002
                                                                                 ---------------   ----------------
Deferred tax asset:
<S>                                                                              <C>               <C>
   Federal..................................................................     $       984,391   $        895,595
   State....................................................................              87,399             79,347
                                                                                 ---------------   ----------------
     Total deferred income tax asset........................................           1,071,790            974,942
                                                                                 ---------------   ----------------
Deferred tax liability:
   Federal..................................................................            (537,179)          (476,096)
   State....................................................................             (48,834)           (43,175)
                                                                                 ---------------   ----------------
     Total deferred income tax liability....................................            (586,013)          (519,271)
                                                                                 ---------------   ----------------
Net deferred tax asset......................................................     $       485,777   $        455,671
                                                                                 ===============   ================
</TABLE>


                                       59
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 16 - Income Taxes - Continued

The tax  effects  of each  type of  income  and  expense  item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>

                                                                                      2003               2002
                                                                                 ---------------   ----------------

<S>                                                                              <C>               <C>
Net unrealized gains on securities available-for-sale.......................     $      (221,223)  $       (231,329)
Depreciation................................................................            (364,790)          (287,942)
Allowance for loan losses...................................................             975,477            913,888
Deferred compensation.......................................................              68,277             60,578
Other.......................................................................              28,036                476
                                                                                 ---------------   ----------------

                                                                                 $       485,777   $        455,671
                                                                                 ===============   ================
</TABLE>

The components of income tax expense (benefit) for the years 2003, 2002 and 2001
are as follows:
<TABLE>
<CAPTION>

                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

Current
<S>                                                           <C>                <C>               <C>
   Federal.................................................   $     1,150,739    $       960,471   $      1,038,142
   State...................................................           122,576             94,469            106,171
Deferred
   Federal.................................................           (19,000)           (45,000)          (179,725)
   State...................................................            (1,000)            (4,000)            (2,000)
                                                              ---------------    ---------------   ----------------

                                                              $     1,253,315    $     1,005,940   $        962,588
                                                              ===============    ===============   ================
</TABLE>

Tax effects of  securities  transactions  resulted in an increase  (decrease) in
income  taxes for 2003,  2002 and 2001 of  approximately  $(5,773),  $97,079 and
$49,972, respectively.

The  principal  reasons for the  difference  in the  effective  tax rate and the
federal  statutory  rate are as follows for the years ended  December  31, 2003,
2002 and 2001.
<TABLE>
<CAPTION>

                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------

<S>                                                                      <C>                <C>                <C>
Statutory federal income tax rate.........................                34.0%              34.0%             34.0%

Effect on rate of:
   Tax-exempt securities..................................                (5.5)              (7.3)             (5.2)
   Tax-exempt loans.......................................                (1.0)              (1.0)             (1.1)
   Interest expense disallowance..........................                 0.5                0.9               0.6
   State income tax, net of federal tax...................                 1.9                1.6               1.9
   Other..................................................                (1.0)              (0.8)             (2.7)
                                                              ----------------   ----------------      ------------

Effective income tax rate.................................                28.9%              27.4%             27.5%
                                                              ================   ================      ============
</TABLE>



                                       60
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 17 - Commitments and Contingencies

In the normal  course of  business,  the Company  offers a variety of  financial
products  to its  customers  to aid  them  in  meeting  their  requirements  for
liquidity, credit enhancement, and interest rate protection.  Generally accepted
accounting  principles  recognize these  transactions as contingent  liabilities
and,  accordingly,   they  are  not  reflected  in  the  accompanying  financial
statements.  Commitments to extend credit, credit card arrangements,  commercial
letters of credit,  and standby  letters of credit all include  exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial  guarantees are the
same as those for  extension  of credit that are  recorded on the  statement  of
financial  condition.  Because these  instruments have fixed maturity dates, and
because  many of them expire  without  being drawn upon,  they do not  generally
present any  significant  liquidity  risk to the  Company.  Management  conducts
regular reviews of these  instruments on an individual  customer basis,  and the
results are considered in assessing the adequacy of the Company's  allowance for
loan losses.  Management  does not anticipate any material losses as a result of
these commitments.

Following is a discussion of these commitments:

Standby Letters of Credit:  These agreements are used by the Company's customers
as a means of improving  their credit  standings in their  dealings with others.
Under  these   agreements,   the  Company  agrees  to  honor  certain  financial
commitments  in the event that its  customers are unable to do so. The amount of
credit risk involved in issuing letters of credit in the event of nonperformance
by the other party is the contract amount. As of December 31, 2003 and 2002, the
Company has issued  standby  letters of credit of  approximately  $1,111,000 and
$1,320,000.  The Company  records a liability  for the  estimated  fair value of
these   standby   letters  of  credit  based  on  the  fees  charged  for  these
arrangements.

Loan Commitments:  As of December 31, 2003 and 2002, the Company had commitments
outstanding to extend credit totaling approximately $43,436,000 and $35,890,000,
respectively.  These  commitments  generally  require the  customers to maintain
certain credit standards.  Management does not anticipate any material losses as
a result of these commitments.

Litigation:  The Company is party to litigation and claims arising in the normal
course of business.  Management, after consultation with legal counsel, believes
that the  liabilities,  if any,  arising from such litigation and claims are not
material to the financial statements.


Note 18 - Concentrations of Credit

All of the Company's loans,  commitments and standby letters of credit have been
granted to  customers  in the  Company's  market  area.  Substantially  all such
customers are depositors of the Company. The concentrations of credit by type of
loan are set forth in Note 6. The commitments to extend credit relate  primarily
to unused real estate draw lines.  Commercial and standby letters of credit were
granted primarily to commercial borrowers.

The Company maintains its cash accounts at various  commercial banks in Georgia.
The total cash balances are insured by the FDIC up to $100,000.  Total uninsured
balances held at other  commercial banks amounted to $235,380 and $11,490,407 at
December 31, 2003 and 2002, respectively.


                                       61
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 19 - Stock Option Plans

The  Company has adopted its 1997  Employee  Stock  Incentive  Plan and its 1997
Directors'  Non-qualified Stock Option Plan under which it has granted statutory
and nonstatutory  stock options to certain directors and employees.  The options
granted  provide for these  directors  and  employees to purchase  shares of the
Company's  $0.01  par value  common  stock at the  market  value at the dates of
grant.  The options granted may be exercised  within ten years from the dates of
grant subject to vesting  requirements.  On April 1, 2003, the Company  approved
and adopted the 2003 Stock Option Plan.

The following  sets forth certain  information  regarding  stock options for the
years ended  December 31, 2003,  2002 and 2001.  Stock option  shares and prices
have been adjusted to reflect the effects of the 10% stock dividend in 2003.
<TABLE>

Fixed Options
<CAPTION>

                                                 2003                     2002                        2001
                                        ----------------------   ------------------------    ----------------------
                                                      Weighted                   Weighted                Weighted
                                                       Average                    Average                 Average
                                                      Exercise                   Exercise                Exercise
                                          Shares       Price         Shares       Price       Shares      Price
                                        ----------  ----------   -----------    ----------   --------   -----------

<S>                                        <C>      <C>              <C>        <C>           <C>       <C>
Outstanding at beginning of year......     502,810  $     5.11       702,790    $     4.71    659,340   $     4.11
Granted...............................      18,000       13.92            --            --     55,000        12.73
Exercised.............................     (82,170)       3.69      (198,880)         3.65     (4,290)        3.83
Forfeited.............................      (5,500)      13.64        (1,100)        13.64     (7,260)       11.65
                                        ----------               -----------                 --------

Outstanding at end of year............     433,140        5.65       502,810          5.11    702,790         4.71
                                        ==========               ===========                 ========

Exercisable at end of year............     362,780        4.57       417,230          4.18    459,470         3.82
                                        ==========               ===========                 ========

Weighted average fair value
   of options granted.................  $     4.20               $        --                 $   4.18
                                        ==========               ===========                 ========
</TABLE>


Information  pertaining  to  options  outstanding  at  December  31,  2003 is as
follows:
<TABLE>
<CAPTION>

                                                                 Outstanding       Expiration           Options
                                                                   Number             Date            Exercisable
                                                              ---------------    ---------------   ----------------

<C>   <C>                                  <C>                          <C>         <C>   <C>
10/07/03 Options with an Exercise Price of $15.00..........             2,500       10/07/13                     --
07/01/03 Options with an Exercise Price of $15.00..........            10,000       07/01/13                     --
01/16/03 Options with an Exercise Price of $12.73..........             5,500       01/16/13                     --
07/10/01 Options with an Exercise Price of $12.73..........            55,000       07/10/11                 22,000
06/30/00 Options with an Exercise Price of $13.64..........             2,200       06/30/10                  1,320
06/22/99 Options with an Exercise Price of $5.45...........            87,560       06/22/09                 69,080
06/01/97 Options with an Exercise Price of $3.64...........           270,380       06/01/07                270,380
                                                              ---------------                      ----------------

Total Options Issued.......................................           433,140                               362,780
                                                              ===============                      ================
</TABLE>

The Company's  options  outstanding have a weighted average  contractual life of
4.62 years.


                                       62
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 20 - Regulatory Matters

The Company and its subsidiary  bank are subject to various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a  direct  material  effect  on the  Company  and its  subsidiary  bank  and the
consolidated  financial  statements.  Under capital adequacy  guidelines and the
regulatory  framework  from  prompt  corrective  action,  the  Company  and  its
subsidiary bank must meet specific capital guidelines that involve  quantitative
measures of their assets,  liabilities,  and certain  off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the  Company and its  subsidiary  bank to maintain  minimum  amounts and
ratios (set forth in the table below) of total and Tier 1 Capital (as defined in
the regulations) to risk weighted assets (as defined), and of Tier 1 Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2003,  that the Company and the Bank meet all capital  adequacy  requirements to
which they are subject.

As of December  31,  2003,  the most  recent  notification  from the  applicable
regulatory agencies categorized Appalachian Community Bank, the subsidiary bank,
as well capitalized under the regulatory framework for prompt corrective action.
To become well  capitalized  the Company and its  subsidiary  bank must maintain
minimum Total Capital, Tier 1 Capital and Tier 1 Leverage ratios as set forth in
the table below.

The Company's and Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>

                                                                                          To Be Well Capitalized
                                                                                                 Under Prompt
                                                                       For Capital             Corrective Action
                                               Actual               Adequacy Purposes             Provisions
                                       -----------------------  ------------------------  ------------------------
                                         Amount         Ratio       Amount        Ratio       Amount        Ratio
                                       ------------  ---------  -------------   --------  --------------  --------
                                                                     (in Thousands)
As of December 31, 2003:

Total Capital
<S>                                    <C>            <C>       <C>                <C>
   Consolidated......................  $     38,291   11.55%    $      26,531      8.00%             N/A      N/A
   Appalachian Community Bank........        36,130   10.91            26,491      8.00   $       33,114    10.00%
Tier 1 Capital
   Consolidated......................        34,681   10.46            13,266      4.00              N/A      N/A
   Appalachian Community Bank........        32,520    9.82            13,246      4.00           19,869     6.00
Tier 1 Leverage
   Consolidated......................        34,681    8.58            16,167      4.00              N/A      N/A
   Appalachian Community Bank........        32,520    8.30            15,663      4.00           19,579     5.00

As of December 31, 2002:

Total Capital
   Consolidated......................  $     26,327    8.59%    $      24,512      8.00%             N/A      N/A
   Appalachian Community Bank........        30,537   10.00            24,425      8.00   $       30,532    10.00%
Tier 1 Capital
   Consolidated......................        23,089    7.54            12,256      4.00              N/A      N/A
   Appalachian Community Bank........        27,299    8.94            12,213      4.00           18,319     6.00
Tier 1 Leverage
   Consolidated......................        23,089    6.07            15,225      4.00              N/A      N/A
   Appalachian Community Bank                27,299    7.17            15,225      4.00           19,032     5.00
</TABLE>

                                       63
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 21 - Employee Benefit Plan

The Company  adopted a defined  contribution  plan  covering  substantially  all
employees;  the plan is qualified  under Section 401(k) of the Internal  Revenue
Code.  Under the provisions of the plan,  eligible  participating  employees may
elect to  contribute  up to the  maximum  amount  of tax  deferred  contribution
allowed by the Internal Revenue Code. Employer and employee contributions may be
made in the form of cash or Company  stock.  The Company's  contribution  to the
plan is  determined by the board of  directors.  The Company made  discretionary
cash  contributions to the plan of approximately  $300,238 in 2003,  $215,353 in
2002 and $223,678 in 2001.


Note 22 - Leases

The  Company  has a  number  of  operating  lease  agreements,  involving  land,
buildings and equipment.  These leases are  noncancellable and expire on various
dates  through  the year 2028.  The  leases  provide  for  renewal  options  and
generally require the Company to pay maintenance,  insurance and property taxes.
For the years  ended  December  31,  2003,  2002 and 2001,  rental  expense  for
operating leases was approximately $81,500, $68,412 and $50,600, respectively.

Future minimum lease payments under noncancellable  operating leases at December
31, 2003, are as follows:
<TABLE>

         Years Ending December 31,
         -------------------------
<S>                 <C>                                                                            <C>
                    2004........................................................................   $         64,581
                    2005........................................................................             47,220
                    2006........................................................................             35,773
                    2007........................................................................             35,538
                    2008........................................................................             34,617
                    Thereafter..................................................................            803,252
                                                                                                   ----------------

                    Total minimum lease payments................................................   $      1,020,981
                                                                                                   ================
</TABLE>


Note 23 - Related Party Transactions

Loans:  Certain  directors,   executive  officers  and  principal  shareholders,
including  their  immediate  families and associates  were loan customers of the
Company  during  2003 and 2002.  Such loans are made in the  ordinary  course of
business at normal credit terms,  including interest rates and collateral and do
not represent more than a normal risk of  collection.  A summary of activity and
amounts outstanding are as follows:
<TABLE>
<CAPTION>

                                                                                      2003               2002
                                                                                 ---------------   ----------------

<S>                                                                              <C>               <C>
Balance at Beginning of Year.................................................    $     7,814,802   $      8,456,182
New loans....................................................................          1,257,065          2,373,027
Repayments...................................................................           (853,748)        (2,330,592)
Participations sold..........................................................          1,011,183           (572,269)
Change in related parties....................................................            143,261           (111,546)
                                                                                 ---------------   ----------------

Balance at End of Year.......................................................    $     9,372,563   $      7,814,802
                                                                                 ===============   ================
</TABLE>

Deposits:  Deposits held from related  parties were $2,224,390 and $1,344,094 at
December 31, 2003 and 2002, respectively.

Lease: The Bank leases a facility from a partnership which includes directors of
the  Company.  The lease  commenced  in May 2001 and had an  initial  term of 24
months.  The Company  exercised its option to renew this lease during 2003 for a
period of one year for an annual  expense of  $33,000.  The lease will expire in
May 2004.

                                       64
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 24 - Litigation

While the Company and its  subsidiaries  are party to various legal  proceedings
arising  from  the  ordinary  course  of  business,  management  believes  after
consultation  with legal  counsel that there are no  proceedings  threatened  or
pending against the Company that will, individually or in the aggregate,  have a
material adverse effect on the business or financial condition of the Company.


Note 25 - Fair Value of Financial Instruments

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

Cash and Short-Term Investments:  For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.

Securities:  For securities and marketable equity securities held for investment
purposes,  fair values are based on quoted market prices or dealer  quotes.  For
other securities held as investments,  fair value equals quoted market price, if
available.  If a quoted market price is not  available,  fair value is estimated
using quoted market prices for similar securities.

Loans:  For certain  homogeneous  categories of loans,  such as some residential
mortgages,  credit card  receivables,  and other consumer  loans,  fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics.  The fair value of other types
of loans is  estimated  by  discounting  the future cash flows using the current
rates at which  similar  loans would be made to borrowers  with  similar  credit
ratings and for the same remaining maturities.

Accrued Interest Receivable:  The carrying amount of accrued interest receivable
approximates its fair value.

Deposits: The fair value of demand deposits, savings accounts, and certain money
market  deposits is the amount payable on demand at the reporting date. The fair
value of  fixed-maturity  certificates  of deposit is estimated  using the rates
currently offered for deposit of similar remaining maturities.

Accrued  Interest  Payable:  The  carrying  amount of accrued  interest  payable
approximates its fair value.

Short-term  Borrowings:  The fair  value  of  short-term  borrowings,  including
securities sold under agreements to repurchase, is estimated to be approximately
the same as the carrying amount.

Long-Term Debt:  Rates currently  available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.

Commitments  to Extend  Credit,  Letters of  Credit,  and  Financial  Guarantees
Written:  The fair value of commitments and letters of credit is estimated to be
approximately the fees charged for these arrangements.


                                       65
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 25 - Fair Value of Financial Instruments - Continued

The estimated fair values of the Company's financial  instruments as of December
31, 2003 and 2002 are as follows:
<TABLE>
<CAPTION>


                                                                   2003                          2002
                                                       ----------------------------  ------------------------------
                                                          Carrying       Fair           Carrying          Fair
                                                           Amount        Value           Amount           Value
                                                       ------------   -------------  -------------  ---------------
                                                                             (in thousands)

Financial Assets
<S>                                                    <C>            <C>            <C>            <C>
   Cash and short-term investments..................   $      7,391   $       7,391  $      30,857  $        30,857
   Securities.......................................         55,363          55,363         40,375           40,375
   Loans............................................        332,306         332,859        298,063          299,334
   Accrued interest receivable......................          2,290           2,290          2,241            2,241
                                                       ------------   -------------  -------------  ---------------

     Total Financial Assets.........................   $    397,350   $     397,903  $     371,536  $       372,807
                                                       ============   =============  =============  ===============

Financial Liabilities
   Deposits.........................................   $    332,919   $     324,654  $     316,283  $       319,075
   Short-term borrowings............................          7,086           7,086          5,929            5,929
   Accrued interest payable.........................            671             671            976              976
   Long-term debt...................................         36,879          39,022         34,736           36,782
                                                       ------------   -------------  -------------  ---------------

     Total Financial Liabilities....................   $    377,555   $     371,433  $     357,924  $       362,762
                                                       ============   =============  =============  ===============

Unrecognized financial instruments
   Commitments to extend credit.....................   $     43,436   $         326  $      35,890  $           269
   Standby letters of credit........................          1,111               8          1,320               10
                                                       ------------   -------------  -------------  ---------------

     Total Unrecognized Financial
       Instruments..................................   $     44,547   $         334  $      37,210  $           279
                                                       ============   =============  =============  ===============
</TABLE>


              [The remainder of this page intentionally left blank]



                                       66
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 26 - Condensed Parent Information

Statements of Financial Condition
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                 ----------------------------------
                                                                                      2003               2002
                                                                                 ---------------   ----------------
Assets
<S>                                                                              <C>               <C>
   Cash and due from banks...................................................    $     1,146,218   $          5,343
   Investment in subsidiaries (equity method) eliminated
     upon consolidation......................................................         34,948,116         29,828,837
   Securities available for sale.............................................            186,000                 --
   Other assets..............................................................          1,127,252            385,109
                                                                                 ---------------   ----------------

     Total Assets............................................................    $    37,407,586   $     30,219,289
                                                                                 ===============   ================

Liabilities and Shareholders' Equity
   Note payable..............................................................    $            --   $      4,600,000
   Subordinated long-term capital notes......................................          6,186,000                 --
   Other liabilities.........................................................            139,233                 --
                                                                                 ---------------   ----------------
     Total Liabilities.......................................................          6,325,233          4,600,000
                                                                                 ---------------   ----------------

     Total Shareholders' Equity..............................................         31,082,353         25,619,289
                                                                                 ---------------   ----------------

     Total Liabilities and Shareholders' Equity..............................    $    37,407,586   $     30,219,289
                                                                                 ===============   ================
</TABLE>


Statements of Income
<TABLE>
<CAPTION>

                                                                            Years ended December 31,
                                                              -----------------------------------------------------
                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------
Income
<S>                                                           <C>                <C>               <C>
   Interest................................................   $            --    $            --   $             --
   Dividends from subsidiaries - eliminated
     upon consolidation....................................                --                 --            250,000
                                                              ---------------    ---------------   ----------------
                                                                           --                 --            250,000

Expenses
   Interest................................................           201,454            205,218            319,067
   Other expenses..........................................           729,245            496,725            490,156
                                                              ---------------    ---------------   ----------------
                                                                      930,699            701,943            809,223
                                                              ---------------    ---------------   ----------------

Loss before income taxes and equity in undistributed
   earnings of subsidiaries................................          (930,699)          (701,943)          (559,223)
Income tax benefits........................................           378,685            257,277            307,196
                                                              ---------------    ---------------   ----------------

Loss before equity in undistributed earnings
   of subsidiaries.........................................          (552,014)          (444,666)          (252,027)

Equity in undistributed earnings of subsidiaries...........         3,638,594          3,112,674          2,790,125
                                                              ---------------    ---------------   ----------------

     Net Income............................................   $     3,086,580    $     2,668,008   $      2,538,098
                                                              ===============    ===============   ================
</TABLE>

                                       67
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 26 - Condensed Parent Information - Continued

Statements of Cash Flow
<TABLE>
<CAPTION>

                                                                            Years ended December 31,
                                                              -----------------------------------------------------
                                                                    2003              2002               2001
                                                              ---------------    ---------------   ----------------
Operating Activities
<S>                                                           <C>                <C>               <C>
   Net Income..............................................   $     3,086,580    $     2,668,008   $      2,538,098
   Adjustments to reconcile net income to net cash
     provided by operating activities
     Equity in undistributed income of subsidiaries........        (3,638,594)        (3,112,674)        (2,790,125)
     Increase (decrease) in accrued interest payable.......            85,200                 --           (108,739)
     Other.................................................          (483,620)          (272,079)           224,262
                                                              ---------------    ---------------   ----------------
       Net Cash Used In Operating Activities...............          (950,434)          (716,745)          (136,504)
                                                              ---------------    ---------------   ----------------

Investing Activities
   Investment in preferred securities trust................          (186,000)                --                 --
   Capital injection in subsidiaries.......................        (1,500,000)        (1,150,000)                --
                                                              ---------------    ---------------   ----------------
       Net Cash Used In Investing Activities...............        (1,686,000)        (1,150,000)                --
                                                              ---------------    ---------------   ----------------

Financing Activities
   Proceeds from issuance of long-term debt................         6,186,000                 --                 --
   Repayment of long-term debt.............................        (4,600,000)                --                 --
   Proceeds from issuance of common stock..................           302,800            889,260            319,689
   Purchases of treasury stock.............................           (54,900)                --                 --
   Compensation associated with issuance of options........            21,739                 --                 --
   Proceeds from issuance of treasury stock................         1,923,601                 --                 --
   Cash paid in lieu of fractional shares on stock dividend            (1,931)           786,705                 --
                                                              ---------------    ---------------   ----------------
       Net Cash Provided By Financing Activities...........         3,777,309          1,675,965            319,689
                                                              ---------------    ---------------   ----------------

Net Increase (Decrease) in Cash and Cash Equivalents.......         1,140,875           (190,780)           183,185

Cash and Cash Equivalents at Beginning of Year.............             5,343            196,123             12,938
                                                              ---------------    ---------------   ----------------

Cash and Cash Equivalents at End of Year...................   $     1,146,218    $         5,343   $        196,123
                                                              ===============    ===============   ================



Cash paid during the year for:
   Interest................................................   $       116,254    $       205,218   $        427,806
</TABLE>



              [The remainder of this page intentionally left blank]

                                       68
<PAGE>
                 APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001


Note 27 - Quarterly Results of Operations (Unaudited)

Selected  quarterly  results of operations  for the four quarters of each of the
years ended December 31, 2003, 2002 and 2001 are as follows:
<TABLE>
<CAPTION>

                                          First          Second          Third         Fourth
                                         Quarter         Quarter        Quarter        Quarter           Total
                                      -------------  -------------   -------------  -------------  ----------------
                                                         (In Thousands Except Per Share Data)
2003:
<S>                                   <C>            <C>             <C>            <C>            <C>
Total interest income..............   $       5,645  $       5,673   $       5,831  $       5,847  $         22,996
Total interest expense.............           2,416          2,234           1,897          1,710             8,257
Provision for loan losses..........             360            360             385            360             1,465
Net interest income after
   provision for loan losses.......           2,869          3,079           3,549          3,777            13,274
Securities gains (losses)..........             (17)            --              --             --               (17)
Total noninterest income...........             721            824             619            650             2,814
Total noninterest expense..........           2,690          2,966           3,006          3,069            11,731
Income tax expense.................             256            291             365            341             1,253
Net income.........................             627            646             797          1,017             3,087

Per Common Share:
   Basic earnings..................            0.18           0.18            0.22           0.28              0.86
   Diluted earnings................            0.17           0.17            0.21           0.26              0.81

2002:
Total interest income..............   $       5,455  $       5,614   $       5,883  $       5,940  $         22,892
Total interest expense.............           2,890          2,825           2,827          2,883            11,425
Provision for loan losses..........             146            216             306            360             1,028
Net interest income after
   provision for loan losses.......           2,419          2,573           2,750          2,697            10,439
Securities gains (losses)..........              20              7               1            258               286
Total noninterest income...........             602            721             881            447             2,651
Total noninterest expense..........           2,095          2,594           2,605          2,408             9,702
Income tax expense.................             295            245             351            115             1,006
Net income.........................             651            462             676            879             2,668

Per Common Share:
   Basic earnings..................            0.20           0.14            0.21           0.26              0.81
   Diluted earnings................            0.18           0.13            0.19           0.26              0.76

2001:
Total interest income..............   $       6,021  $       5,955   $       5,979  $       5,935  $         23,890
Total interest expense.............           3,648          3,386           3,389          3,252            13,675
Provision for loan losses..........             366            126             326            476             1,294
Net interest income after
   provision for loan losses.......           2,007          2,443           2,264          2,207             8,921
Securities gains (losses)..........              94             24             (19)            48               147
Total noninterest income...........             597            443             510            714             2,264
Total noninterest expense..........           1,832          1,859           1,940          2,200             7,831
Income tax expense.................             262            292             271            138               963
Net income.........................             604            759             544            631             2,538

Per Common Share:
   Basic earnings..................            0.19           0.25            0.17           0.20              0.81
   Diluted earnings................            0.17           0.23            0.16           0.19              0.75

</TABLE>

                                       69
<PAGE>






ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

         None.


ITEM 9A.      CONTROLS AND PROCEDURES

     The Company's  Chief  Executive  Officer and Chief  Financial  Officer have
evaluated the Company's  disclosure controls and procedures as of the end of the
fiscal  year  covered by this  Report on Form 10-K and have  concluded  that the
Company's  disclosure  controls and procedures are effective.  During the fourth
quarter of 2003,  there were no changes in the Company's  internal  control over
financial reporting that have materially affected, or that are reasonably likely
to materially affect, the Company's internal control over financial reporting.


                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  appearing  under the headings  "Election  of  Directors,"
"Executive  Officers," "Section 16(a) Beneficial Ownership Reporting Compliance"
and "Corporate  Governance and Board Matters" in the Proxy  Statement (the "2004
Proxy Statement")  relating to the Company's 2004 annual meeting of shareholders
is  incorporated  herein by reference.  The Company has adopted a code of ethics
that  applies to the  Company's  chief  executive  officer and senior  financial
officers, a copy of which is attached to this Form 10-K as Exhibit 14.



ITEM 11.   EXECUTIVE COMPENSATION

     The  information  appearing  under the heading  "Compensation  of Executive
Officers and Directors" in the 2004 Proxy  Statement is  incorporated  herein by
reference.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information  appearing under the heading "Ownership of Common Stock" in
the 2004 Proxy Statement is incorporated herein by reference.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information appearing under the caption "Related Party Transactions" in
the 2004 Proxy Statement is incorporated herein by reference.


ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The   information   appearing   under  the  caption   "Independent   Public
Accountants" in the 2004 Proxy Statement is incorporated herein by reference.

                                       70
<PAGE>


                                     PART IV

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  1.   Financial Statements.

          The following  consolidated financial statements are located in Item 8
          of this Report:

          Independent  Auditors'  Report  Consolidated  Statements  of Financial
          Condition as of December 31, 2003 and 2002 Consolidated  Statements of
          Income  for  the  Years  Ended  December  31,  2003,   2002  and  2001
          Consolidated  Statements of  Shareholders'  Equity for the Years Ended
          December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows
          for the  Years  Ended  December  31,  2003,  2002  and  2001  Notes to
          Consolidated Financial Statements Quarterly Results (Unaudited)

    2.    Financial Statement Schedules.

          Schedules to the consolidated financial statements are omitted, as the
          required information is not applicable.

    3.    Exhibits.

          The following  exhibits are filed or incorporated by reference as part
          of this Report:
<TABLE>
<CAPTION>

         Exhibit Number                                Description of Exhibit
-----------------------------       --------------------------------------------

<S>           <C>
              3.1                   Articles of Incorporation of the Company, as
                                    Restated (included as Exhibit 3.1 to the
                                    Company's Quarterly Report on Form 10-Q,
                                    dated August 15, 2003 (File No. 000-21383),
                                    previously filed with the Commission and
                                    incorporated herein by reference).

              3.2                   Bylaws of the Company, as Restated (included
                                    as Exhibit 3.2 to the Company's Quarterly
                                    Report on Form 10-Q, dated August 15, 2003
                                    (File No. 000-21383), previously filed with
                                    the Commission and incorporated herein by
                                    reference).

              10.1                  1997 Directors'  Non-Qualified  Stock Option
                                    Plan (included as Exhibit 10.1 to the
                                    Company's  Annual Report on Form 10-K for
                                    the fiscal year ended  December 31, 1996
                                    (File No. 000-21383) and incorporated herein
                                    by reference).*

              10.2                  1997 Employee Incentive Stock Incentive Plan
                                    (included as Exhibit 10.2 to the Company's
                                    Annual Report on Form 10-K for the fiscal
                                    year ended  December 31, 1996 (File No.
                                    000-21383) and incorporated herein by
                                    reference).*

              10.3                  Adoption  Agreement for the Appalachian
                                    Bancshares, Inc. Employees' Savings & Profit
                                    Sharing  Plan (the  "Plan")  (filed as
                                    Exhibit  10.1 to the Plan's  Annual Report
                                    on Form  11-K for the  fiscal  year  ended
                                    December  31,  2001  (File No. 001-15571)
                                    and incorporated herein by reference).

</TABLE>

                                       71
<PAGE>

<TABLE>
<CAPTION>

         Exhibit Number                                Description of Exhibit
-----------------------------       --------------------------------------------


<S>           <C>
              10.4                  Pentegra Services, Inc. Employees' Savings &
                                    Profit Sharing Plan Basic Plan Document, and
                                    the following related documents: Trust
                                    Agreement by and between Appalachian
                                    Bancshares, Inc. and the Bank of New York;
                                    Custody Agreement by and between Tracy R.
                                    Newton, Kent W. Sanford and Joseph Hensley,
                                    as Trustee on behalf of the Appalachian
                                    Bancshares, Inc. Employees' Savings & Profit
                                    Sharing Plan, and the Bank of New York (with
                                    Letter Notification to the Bank of New York
                                    providing an updated list of members of the
                                    Administrative Committee); and the Internal
                                    Revenue Service Favorable Approval Letter of
                                    the Pentegra Services, Inc. Prototype
                                    Non-Standardized Profit Sharing Plan (filed
                                    as Exhibit 10.2 to the Plan's Annual Report
                                    on Form 11-K for the fiscal year ended
                                    December 31, 2001 (File No. 001-15571) and
                                    incorporated herein by reference).

              10.5                  Form of Deferred Fee Agreement between
                                    Gilmer County Bank and certain  directors
                                    and  executive  officers,  with  addendum
                                    (filed as Exhibit 10.6 to the Company's
                                    Quarterly  Report on Form  10-QSB  for the
                                    period  ended  June 30,  1997 (File No.
                                    000-21383) and incorporated herein by
                                    reference).

              10.6                  Loan and Stock Pledge Agreement, dated as of
                                    April 3, 2002, between the Company and
                                    Crescent Bank and Trust Company (filed as
                                    Exhibit 10.1 to the Company's Quarterly
                                    Report on Form 10-QSB for the period ended
                                    September 30, 2002 (File No. 001-15571) and
                                    incorporated herein by reference).

              10.7                  Promissory Note, dated April 3, 2002, issued
                                    by the Company to Crescent Bank and Trust
                                    Company (filed as Exhibit 10.2 to the
                                    Company's Quarterly Report on Form 10-QSB
                                    for the period ended September 30, 2002
                                    (File No. 001-15571) and incorporated herein
                                    by reference).

              10.8                  Form of Data Processing Agreement by and
                                    between Appalachian Community Bank and
                                    Fiserv Solutions, Inc., effective as of July
                                    26, 2002 (filed as Exhibit 10.3 to the
                                    Company's Quarterly Report on Form 10-QSB
                                    for the period ended September 30, 2002
                                    (File No. 001-15571) and incorporated herein
                                    by reference).

              10.9                  2003 Stock Option Plan (included as Exhibit
                                    10.1 to the  Company's  Quarterly Report on
                                    Form 10-Q for the period  ended June 30,
                                    2003 (File No. 000-21383) and incorporated
                                    herein by reference).*

              11                    Statement re: Computation of Per Share
                                    Earnings

              12                    Statement re: Computation of Ratios

              14                    Code of Ethics for CEO and Senior Financial
                                    Officers

              21                    Subsidiaries of the Registrant
</TABLE>


                                       72
<PAGE>

<TABLE>
<CAPTION>

         Exhibit Number                                Description of Exhibit
-----------------------------       -------------------------------------------


<S>           <C>
              23                    Consent of Schauer, Taylor, Cox, Vise,
                                    Morgan & Fowler, P.C.

              31.1                  Certification of President and Chief
                                    Executive Officer Pursuant to Section 302
                                    of Sarbanes-Oxley Act of 2002.

              31.2                  Certification of Chief Financial Officer
                                    Pursuant to Section 302 of Sarbanes-Oxley
                                    Act of 2002.

              32                    Certifications Pursuant to Section 906 of
                                    arbanes-Oxley Act of 2002.
</TABLE>

o The referenced exhibit is a compensatory contract, plan or arrangement.







(b)  A current  report on Form 8-K dated  October 23,  2003,  was filed with the
     Securities  and Exchange  Commission  under Items 5 ("Other  Events") and 7
     ("Financial Statements and Exhibits") of such form, involving the Company's
     issuance  of a press  release  announcing  an  increase  in the  regulatory
     capital of the Company, resulting from the issuance and sale, on August 28,
     2003, of $6,000,000 of Appalachian Capital Trust I preferred securities.

     A current  report on Form 8-K dated  November  4, 2003,  was filed with the
     Securities and Exchange Commission under Items 7 ("Financial Statements and
     Exhibits") and 12 ("Results of Operation and Financial  Condition") of such
     form, involving the Company's issuance of a press release dated November 4,
     2003,  reporting the unaudited  results of operations  and earnings for the
     three months and nine months ended September 30, 2003.

     A current  report on Form 8-K dated  November 10, 2003,  was filed with the
     Securities and Exchange Commission under Items 7 ("Financial Statements and
     Exhibits") and 12 ("Results of Operation and Financial  Condition") of such
     form,  involving the Company's  issuance of a press release dated  November
     10, 2003, announcing a restatement of the earnings-per-share  data included
     in its report of unaudited results of operations and earnings for the three
     months and nine months ended September 30, 2003, as previously  reported on
     November 4, 2003.


                                       73
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 29th day of
March, 2003.


                                                    APPALACHIAN BANCSHARES, INC.


                             By:      /s/ Tracy R. Newton
                                      ------------------------------------------
                                      Tracy R. Newton
                                      President and Chief Executive Officer

                             By:      /s/ Darren M. Cantlay
                                      ------------------------------------------
                                      Darren M. Cantlay
                                      Chief Financial Officer


     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

/s/ Tracy R. Newton                                         Date: March 29, 2004
--------------------------------------------
Tracy R. Newton, President, Chief
Executive Officer and Director

/s/ Alan S. Dover                                           Date: March 29, 2004
--------------------------------------------
Alan S. Dover, Director

/s/ Charles A. Edmondson                                    Date: March 29, 2004
--------------------------------------------
Charles A. Edmondson, Director

/s/ Roger E. Futch                                          Date: March 29, 2004
--------------------------------------------
Roger E. Futch, Director

/s/ Joseph C. Hensley                                       Date: March 29, 2004
--------------------------------------------
Joseph C. Hensley, Director

/s/ Frank E. Jones                                          Date: March 29, 2004
--------------------------------------------
Frank E. Jones, Director

/s/ J. Ronald Knight                                        Date: March 29, 2004
--------------------------------------------
J. Ronald Knight, Director

/s/ P. Joe Sisson                                           Date: March 29, 2004
--------------------------------------------
P. Joe Sisson, Director

/s/ Kenneth D. Warren                                       Date: March 29, 2004
--------------------------------------------
Kenneth D. Warren, Director

                                       74
<PAGE>


                                  EXHIBIT INDEX

     The  following  exhibits  are filed as part of this report (in  addition to
those  exhibits  listed in Item 15 which are filed as a part of this  report and
incorporated by reference):

<TABLE>
<CAPTION>

         Exhibit Number                                Description of Exhibit                             Page
------------------------------      ------------------------------------------------------------     ----------------

<S>           <C>                                                                                           <C>
              11                    Statement re: Computation of Per Share Earnings                         76

              12                    Statement re: Computation of Ratios                                     77

              14                    Code of Ethics for CEO and Senior Financial Officers                    78

              21                    Subsidiaries of the Registrant                                          79

              23                    Consent of Schauer, Taylor, Cox, Vise, Morgan & Fowler, P.C.            80

              31.1                  Certification of President and Chief Executive Officer
                                    Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                  81

              31.2                  Certification of Chief Financial Officer Pursuant to
                                    Section 302 of Sarbanes-Oxley Act of 2002.                              82

              32                    Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.   83

</TABLE>


                                       75
<PAGE>


EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS

                          Appalachian Bancshares, Inc.
                   Computation of Net Income Per Common Share

     The  following  tabulation  presents the  calculation  of basic and diluted
earnings per common share for the years ended December 31, 2003,  2002 and 2001.
All share  amounts  have been  retroactively  adjusted to give effect to the ten
percent stock dividend issued in July 2003.
<TABLE>
<CAPTION>

                                                                        2003               2002             2001
                                                                 ----------------   ---------------    ---------------
Basic Earnings Per Share:
<S>                                                              <C>                <C>                <C>
   Net income................................................    $      3,086,580   $     2,668,008    $     2,538,098
                                                                 ================   ===============    ===============

   Earnings on common shares.................................    $      3,086,580   $     2,668,008    $     2,538,098
                                                                 ================   ===============    ===============

   Weighted average common shares outstanding - basic........           3,609,728         3,277,787          3,145,651
                                                                 ================   ===============    ===============

   Basic earnings per common share...........................    $           0.86    $          0.81    $          0.81
                                                                 ================    ===============    ===============

Diluted Earnings Per Share:
   Net income................................................    $      3,086,580   $     2,668,008    $     2,538,098
                                                                 ================   ===============    ===============

   Weighted average common shares
     outstanding.............................................           3,609,728         3,277,787          3,145,651

   Net effect of the assumed exercise of stock
     options - based on the treasury stock method
     using average market price for the year.................             199,897           230,232            243,753
                                                                 ----------------   ---------------    ---------------

   Weighted average common shares outstanding -
     diluted.................................................           3,809,625         3,508,019          3,389,404
                                                                 ================   ===============    ===============

   Diluted earnings per common share.........................    $           0.81   $          0.76    $          0.75
                                                                 ================   ===============    ===============
</TABLE>


                                       76
<PAGE>


EXHIBIT 12 - STATEMENTS RE: COMPUTATION OF RATIOS
<TABLE>

                          Appalachian Bancshares, Inc.
                Computation of Ratio of Earnings to Fixed Charges
<CAPTION>

                                                                               Year Ended December 31,
                                                                  -------------------------------------------------
                                                                       2003             2002              2001
                                                                  --------------    -------------    --------------
                                                                               (Dollars in thousands)

<S>                                                               <C>               <C>              <C>
Pretax income.................................................    $        4,340    $       3,674    $        3,501
Add fixed charges:
   Interest on deposits.......................................             6,959            9,353            11,295
   Interest on borrowings.....................................             1,297            2,073             2,380
   Portion of rental expense representing interest expense....                27               23                17
                                                                  --------------    -------------    --------------
     Total fixed charges......................................             8,283           11,449            13,692
                                                                  --------------    -------------    --------------

Income before fixed charges...................................    $       12,623    $      15,123    $       17,193
                                                                  ==============    =============    ==============

Pretax income.................................................    $        4,340    $       3,674    $        3,501
Add fixed charges (excluding interest on deposits):
   Interest on borrowings.....................................             1,297            2,073             2,380
   Portion of rental expense representing interest expense....                27               23                17
                                                                  --------------    -------------    --------------
     Total fixed charges......................................             1,324            2,096             2,397
                                                                  --------------    -------------    --------------

Income before fixed charges (excluding interest on
   deposits)..................................................    $        5,664    $       5,770    $        5,898
                                                                  ==============    =============    ==============

Ratio of Earnings to Fixed Charges
   Including interest on deposits.............................              1.52             1.32              1.26
   Excluding interest on deposits.............................              4.28             2.75              2.46
</TABLE>

                                       77
<PAGE>


Exhibit 14 - Code of ethics for ceo and senior financial officers

                          APPALACHIAN BANCSHARES, INC.

                                 Code of Ethics
                                       For
              Chief Executive Officer and Senior Financial Officers




     The Company has a Code of Conduct  applicable  to all  officers and certain
other designated  employees of the Company.  The Chief Executive Officer and all
senior  financial  officers,  including the Chief Financial  Officer,  Corporate
Controller and senior  accounting  personnel  identified by the Chief  Financial
Officer (the "senior financial  officers") are bound by the provisions set forth
in the Code of Conduct  relating to ethical  conduct,  conflicts of interest and
compliance  with law. In addition  to the Code of Conduct,  the Chief  Executive
Officer and senior  financial  officers are subject to the following  additional
specific policies:

1.   The  Chief  Executive  Officer  and  all  senior  financial   officers  are
     responsible for full, fair, accurate,  timely and understandable disclosure
     in the periodic  reports  required to be filed by the Company with the SEC.
     Accordingly,  it is the  responsibility  of the Chief Executive Officer and
     each senior  financial  officer to promptly  bring to the  attention of the
     Chief  Financial  Officer  and the  Chairman  of the  Audit  Committee  any
     material  information  of which he or she may become aware that affects the
     disclosures  made by the Company in its public filings or otherwise  assist
     the Chief  Financial  Officer and the  Chairman of the Audit  Committee  in
     assuring that the Company fulfills its  responsibilities  in preparation of
     such disclosures.

2.   The  Chief  Executive  Officer  and each  senior  financial  officer  shall
     promptly  bring to the  attention  of the Chief  Financial  Officer and the
     Chairman  of  the  Audit  Committee  any  information  he or she  may  have
     concerning  (a)  significant  deficiencies  in the design or  operation  of
     internal  controls which could  adversely  affect the Company's  ability to
     record,  process,  summarize  and report  financial  data or (b) any fraud,
     whether or not material,  that involves  management or other  employees who
     have a significant role in the Company's financial  reporting,  disclosures
     or internal controls.

3.   The  Chief  Executive  Officer  and each  senior  financial  officer  shall
     promptly  bring to the  attention  of the Chief  Financial  Officer  or the
     Chairman  of  the  Audit  Committee  any  information  he or she  may  have
     concerning  any violation of the Company's  Code of Conduct,  including any
     actual or apparent  conflicts of interest between personal and professional
     relationships,  involving  any  management  or other  employees  who have a
     significant  role in the  Company's  financial  reporting,  disclosures  or
     internal controls.

4.   The  Chief  Executive  Officer  and each  senior  financial  officer  shall
     promptly  bring to the  attention  of the Chief  Financial  Officer  or the
     Chairman  of  the  Audit  Committee  any  information  he or she  may  have
     concerning evidence of a material violation of the securities laws or other
     laws,  rules or regulations  applicable to the Company and the operation of
     its business,  by the Company or any agent thereof,  or of violation of the
     Code of Conduct or of these additional policies.

5.   The Board of Directors shall determine, or designate appropriate persons to
     determine,  appropriate  actions to be taken in the event of  violations of
     the Code of Conduct or of these additional  policies by the Chief Executive
     Officer and the Company's senior financial  officers.  Such action shall be
     reasonably  designed to deter wrongdoing and to promote  accountability for
     adherence to the Code of Conduct and to these  additional  procedures,  and
     shall include written notices to the individual involved that the Board has
     determined that there has been a violation,  censure by the Board, demotion
     or re-assignment of the individual involved, suspension with or without pay
     or benefits (as determined by the Board) or termination of the individual's
     employment. In determining what action is appropriate in a particular case,
     the  Board of  Directors  or such  designee  shall  take into  account  all
     relevant  information,  including the nature and severity of the violation,
     whether the  violation  was a single  occurrence  or repeated  occurrences,
     whether the  violation  appears to have been  intentional  or  inadvertent,
     whether the  individual in question had been advised prior to the violation
     as to the proper  course of action,  and whether or not the  individual  in
     question had committed other violations in the past.


                                       78
<PAGE>


EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT




Subsidiaries - Direct/wholly-owned                        State of Incorporation
----------------------------------                        ----------------------

Appalachian Capital Trust I                                     Delaware

Appalachian Community Bank                                      Georgia
     Also doing business under the registered trade name "Gilmer County Bank"


Subsidiaries - Indirect/wholly-owned by Appalachian Community Bank
------------------------------------------------------------------

Appalachian Information Management, Inc.                        Georgia

                                       79
<PAGE>


EXHIBIT 23 - CONSENT OF SCHAUER TAYLOR COX VISE MORGAN & FOWLER, P.C.





                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


     As independent public  accountants,  we hereby consent to the incorporation
of our report  included in this Form 10-K, into the Company's  previously  filed
Registration Statements on Form S-8.


                               /s/ Schauer Taylor Cox Vise Morgan & Fowler, P.C.



                                   Schauer Taylor Cox Vise Morgan & FOWLER, P.C.

Birmingham, Alabama
March 29, 2004

                                       80
<PAGE>


EXHIBIT 31.1

             CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER

I, Tracy R. Newton, certify that:

1.   I have reviewed this Annual Report on form 10-K of Appalachian  Bancshares,
     Inc.;

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

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

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

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

     b)   [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

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

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

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

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

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

Date: March 29, 2004
                                           /s/ Tracy R. Newton
                                           -------------------------------------
                                           Tracy R. Newton
                                           President and Chief Executive Officer

                                       81
<PAGE>


EXHIBIT 31.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Darren M. Cantlay, certify that:

1.   I have reviewed this Annual Report on form 10-K of Appalachian  Bancshares,
     Inc.;

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

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

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

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

     b)   [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]

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

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

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

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

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

Date: March 29, 2004

                                            /s/ Darren M. Cantlay
                                           -------------------------------------
                                           Darren M. Cantlay
                                           Chief Financial Officer

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<PAGE>


EXHIBIT 32

                           CERTIFICATIONS PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report of Appalachian  Bancshares,  Inc. (the
"Company")  on Form 10-K for the year ended  December 31, 2003 as filed with the
Securities  and  Exchange  Commission  on the date  hereof (the  "Report"),  the
undersigned,  Tracy R.  Newton,  President  and Chief  Executive  Officer of the
Company,  and Darren M. Cantlay,  Chief  Financial  Officer,  do hereby certify,
pursuant to 18 U.S.C.  Section 1350,  as adopted  pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

     (1)  The Report fully  complies with the  requirements  of section 13(a) of
          the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
          material respects,  the financial  condition and results of operations
          of the Company.

By:
         /s/ Tracy R. Newton
         -------------------------------------
         Tracy R. Newton
         President and Chief Executive Officer
         March 29, 2004



         /s/ Darren M. Cantlay
         -------------------------------------
         Darren M. Cantlay
         Chief Financial Officer
         March 29, 2004



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