================================================================================
                                  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, 2002 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 28, 2002 was  $34,008,024,  based on a per share price of $15.00,  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 28, 2003, there were 3,245,209 shares of the registrant's  Common Stock
outstanding.


Documents Incorporated by Reference

Portions of the  registrant's  definitive  Proxy  Statement  for the 2003 Annual
Meeting of  Shareholders  are  incorporated  by reference  into Part III of this
report.

================================================================================
<PAGE>
                          APPALACHIAN BANCSHARES, INC.

                          2002 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.................           30

   Item 8.            Financial Statements.......................................................           31

   Item 9.            Changes in and Disagreements with Accountants on Accounting
                      and Financial Disclosure...................................................           67

PART III

   Item 10.           Directors and Executive Officers of the Registrant.........................           67

   Item 11.           Executive Compensation.....................................................           67

   Item 12.           Security Ownership of Certain Beneficial Owners and Management.............           67

   Item 13.           Certain Relationships and Related Transactions.............................           67

   Item 14.           Controls and Procedures....................................................           67

PART IV

   Item 15.           Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........           68

Signatures

Certification of Periodic Financial Reports
</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.

     In 2000,  Appalachian  Information  Management,  Inc.  ("AIM"),  a  Georgia
corporation,  was formed as a  wholly-owned  subsidiary  of the Bank, to provide
in-house  data  services  to the Bank and to offer data  processing  services to
other institutions.  In August 2002, however,  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. The
Bank continues to provide limited, administrative services, formerly provided by
AIM, to another bank on a subcontract basis.

                                       2

<PAGE>
     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
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.

     As  discussed  previously,   the  former  Appalachian  Community  Bank  was
organized in 1981,  as an insured  national  bank,  chartered  under the federal
banking laws of the United  States of America.  In 1999,  Appalachian  Community
Bank converted from a national bank to a state-chartered  bank under the laws of
the State of Georgia, and, in 2001, was merged with and into the Bank.

     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 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, 2002,  the Bank had a
total of 111 employees,  94 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
8.6% of the Bank's total loans at December 31, 2002.

                                       3

<PAGE>
     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 $239 million, or 80.1%,
of the  Bank's  total  loans at  December  31,  2002.  These  loans  consist  of
commercial real estate loans, construction and development loans and residential
real estate  loans,  but exclude  home equity  loans,  which are  classified  as
consumer loans.

     Commercial  Loans. The Bank makes loans for commercial  purposes to various
lines of  businesses.  At December 31,  2002,  the Bank held  approximately  $33
million, or 11.2% 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.

     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, 2002,  the Bank held  approximately  $20
million in consumer loans, representing 6.8% 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 $150,000,  depending on seniority  and the
type of loan.  The officers'  loan  committee,  which consists of the president,
executive  vice  president and senior  lending  officer,  has a lending limit of
$200,000 for secured loans. Loans between $200,000 and $500,000 must be approved
by a directors'  loan committee,  which is made up of the president,  the senior
lending  officer  and three  outside  directors.  Loans above  $500,000  require
approval by the majority of the full board of 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 employed
an  in-house  specialist  to  review  all loans in  excess  of  $100,000  and to
periodically sample loans of $100,000 and less.

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, 2002.

<TABLE>
<CAPTION>
                                           Deposit Mix

                                                                                      December 31, 2002

<S>                                                                                                <C>
         Non-interest bearing demand..............................................                 6.92%
         Interest-bearing demand..................................................                26.10%
         Savings..................................................................                13.03%
         Time Deposits............................................................                34.81%
         Certificates of Deposit of $100,000 or more..............................                19.14%
                                                                                    -------------------
           Total..................................................................               100.00%
                                                                                    ===================
</TABLE>

     The  Bank is a  member  of the  Cirrus  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

                                       4

<PAGE>
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,  Gilmer  County and  Blairsville,  Union
County,  Georgia 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,  southwestern  Fannin  County,
northern  Pickens  County,  western Dawson County,  southeastern  Murray County,
Union County, Towns County and Fannin County, Georgia.

     As of  December  31,  2002,  three  non-locally-owned  banks had offices in
Gilmer County and two locally-owned banks had offices in Blairsville. B B & T, a
bank holding company headquartered in Winston-Salem,  North Carolina, operates a
full service branch and a separate drive-thru facility in Gilmer County. Regions
Bank,  an Alabama bank holding  company,  operates one office in Gilmer  County.
United  Community  Bank, a branch of Peoples Bank in Fannin County,  maintains a
branch  office  in  Gilmer  County.  Bank of  Blairsville,  a branch  of Bank of
Hiawassee,  operates an office in Blairsville.  Union County Bank, headquartered
in  Blairsville,  operates an office in  Blairsville.  In  addition,  many local
businesses and  individuals  have deposits  outside the primary service areas 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.

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 (the  "Holding  Company  Act"),  which  places the
Company under the supervision of the Federal Reserve. The Company must register,
and 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.

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

                                       5
<PAGE>

     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.

     Generally,  the 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
determines  that such  activities  are  incidental  or  closely  related  to the
business of banking. However, under the Financial Services Modernization Act (as
discussed  below  under  "Financial  Services  Modernization"),  a bank  holding
company  meeting  certain  qualifications  may apply to the  Federal  Reserve to
become a "financial  holding company," and thereby engage (directly or through a
subsidiary)  in certain  activities  deemed to be financial  in nature,  such as
securities brokerage and insurance underwriting.

     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 approval of the Federal Reserve before acquiring 25% (5% if the "company" is
a bank  holding  company)  or more of the  outstanding  shares of, 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  Gramm-Leach-Bliley  Act of 1999 (the "GLB Act"),  which became effective in
2000.  Generally,  the GLB Act (i) repealed the  historical  restrictions  which
prevented banks from affiliating with securities  firms, (ii) provided a uniform
framework  for the  activities  of banks  and  their  holding  companies,  (iii)
broadened the activities  that may be conducted by the 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  that  register  with  the  Federal  Reserve  as a
"financial  holding  company"  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,  itself,  be owned,  controlled or acquired by any company
engaged in financially related activities, as long as such company meets certain
regulatory requirements,  including its registration with the Federal Reserve as
a financial holding company.  The GLB Act also permits banks, either directly or
through  operating  subsidiaries,  to engage in  certain  non-banking  financial
activities, subject to certain regulatory requirements.

     The Company has no present  intentions  to register as a financial  holding
company.

     Transactions  with  Affiliates.  The  Company and the Bank are deemed to be
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,  the
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 a
requirement that the customer obtain  additional  services provided by either of
the Company or the Bank,  or on 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  Banking Law  Requirements.  As a Georgia  banking  corporation,  the
Company is subject to certain requirements under applicable Georgia banking law.
For  example,  the  Company is  required  to  register  with the DBF and to file
periodic information with the DBF.

                                       6
<PAGE>

     The Bank

     General.  The Bank,  as a  Georgia  state-chartered  bank,  is  subject  to
regulation  and  examination  by the  DBF,  as  well as by the  Federal  Deposit
Insurance Corporation.  Georgia laws regulate,  among other things, the scope of
the Bank's business,  its investments,  its payment of dividends to the Company,
its required lending reserves and lending limits,  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 of 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 the financial institutions under its authority. These standards cover, among
others, internal controls, information systems, and internal audit systems, loan
documentation, credit underwriting,  interest-rate exposure, asset growth, asset
quality,  executive  compensation,  earnings  and  such  other  operational  and
managerial  standards as the agency  determines  to be  appropriate.  Management
believes that the Bank meets all such standards.

     Interstate  Banking and Branching.  The Riegle-Neal  Interstate Banking and
Branching  Efficiency  Act of 1994 (the  "Interstate  Act")  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.  Generally,
Georgia  banking  law  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 three (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 deposit insurance 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  Federal  Deposit   Insurance   Corporation  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

                                       7

<PAGE>

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 Federal Reserve also employs 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 may leverage its
equity capital base. The Federal  Reserve  requires a minimum  leverage ratio of
3%. However,  for all but the most highly rated bank holding companies,  as well
as for bank holding companies seeking to expand,  the Federal Reserve expects an
additional cushion of at least 1% to 2%.

     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,  an  institution  is  assigned  to one of  five  capital
categories, depending upon 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  upon the
category  to  which  they  are  assigned,   are  subject  to  certain  mandatory
supervisory corrective actions.

     Recent Significant Changes in Applicable Laws and Regulations

     Sarbanes-Oxley  Act of 2002. On July 30, 2002,  the  Sarbanes-Oxley  Act of
2002 (the  "Sarbanes-Oxley  Act") was adopted, in order to address corporate and
accounting fraud. The Sarbanes-Oxley Act establishes a new accounting  oversight
board that will enforce  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  Sarbanes-Oxley  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
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.

                                       8

<PAGE>

     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 $30,600.

     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 $30,000.

     The Bank's  operations  area  operates out of a building  owned by the Bank
located at 1068 Progress Road, Ellijay, Georgia. This location houses the Bank's
computer  center,  accounting,  bookkeeping  and data  processing  services.  In
addition, the building includes an additional 4,600 square feet, which is leased
by the Bank to a third party for $24,000 per year.

     Management believes that the physical facilities  maintained by the Company
and the Bank are suitable for its 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 of  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  Common  Stock 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 April 2000, the Company effected a two-for-one share split of its Common
Stock (the "Stock Split") in the form of a common stock dividend,  payable on or
about April 30, 2000, to  shareholders  of record as of the close of business on
April 12,  2000.  All  amounts  presented  in this  Report and in the  financial
statements are adjusted to reflect the Stock Split.  The net effect of the Stock
Split did not change total shareholders' equity.


              [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 2002. To the best of management's knowledge,  the last trade in December,
2002 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
                                                                                    -------------    --------------
2002 (Split Adjusted):
<S>                                                                                 <C>              <C>
   First Quarter.................................................................   $       17.00    $        15.00
   Second Quarter................................................................           16.00             15.00
   Third Quarter.................................................................           15.00             15.00
   Fourth Quarter................................................................           15.00             15.00

2001 (Split Adjusted):
   First Quarter.................................................................   $       15.00    $        14.00
   Second Quarter................................................................           15.00             14.00
   Third Quarter.................................................................           15.00             14.00
   Fourth Quarter................................................................           15.00             14.00
</TABLE>

Holders

     At March 19,  2003,  the  Company  had  3,165,141  shares  of Common  Stock
outstanding held by approximately 1,411 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 52,447 shares of Common Stock  through the Offering,  which expired
on March 3, 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.  For the years ended  December 31,
2002,  2001 and 2000, the Bank paid  dividends to the Company of $-0-,  $250,000
and $700,000, respectively, which were used by the Company for repayment of debt
and other expenses.

     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 dividends to date.

                                       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, 2002.

<TABLE>
<CAPTION>

                                                                                                   Number of
                                                                                               Equity Securities
                                                  Number of 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....................               458,100    $            5.64                74,000

Equity Compensation Plans
   Not Approved by Shareholders................                    --                   --                    --
                                                   ------------------    -----------------     -----------------

   Total.......................................               458,100    $            5.64                74,000
                                                   ==================    =================     =================
</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 years ended December 31, 2002, and the previous four years.  All
averages are daily averages.

<TABLE>
<CAPTION>

                                                                          Years Ended December 31,
                                                       ------------------------------------------------------------
                                                           2002         2001        2000        1999       1998
                                                       ----------    ---------   ---------   ----------  ----------
                                                           (Dollars in thousands except per share data and ratios)
Earnings Summary
<S>                                                    <C>           <C>         <C>         <C>         <C>
   Interest income..................................   $   22,914    $  24,763   $  21,970   $   16,139  $   11,271
   Interest expense.................................       11,425       13,675      13,325        9,139       6,498
   Net interest income..............................       11,489       11,088       8,645        7,001       4,773
   Provision for loan losses........................        1,028        1,294         922          880         300
   Non-interest income..............................        2,915        1,538       1,159          845         529
   Non-interest expense.............................        9,702        7,831       6,380        5,561       3,221
   Applicable income taxes..........................        1,006          963         872          139         572
   Net income.......................................        2,668        2,538       1,629        1,266       1,208

Per Share Data
(Retroactively adjusted to give effect to stock splits)
   Net income - basic...............................   $     0.90    $    0.89   $    0.59   $     0.48  $     0.52
   Net income - diluted.............................         0.84         0.82        0.55         0.44        0.49
   Cash dividends declared per common share.........         0.00         0.00        0.00         0.00        0.00

Selected Period End Balances
   Total assets.....................................      384,024      319,679     270,943      223,315     189,745
   Loans............................................      298,063      250,569     214,124      169,106     129,831
   Securities.......................................       40,375       49,394      32,541       28,536      21,940
   Earning assets...................................      354,593      303,923     253,263      207,501     176,789
   Deposits.........................................      316,283      264,028     214,169      186,730     163,861
   Long-term borrowings.............................       34,736       29,654      34,539       16,964      11,007
   Shareholders' equity.............................       25,619       20,591      17,669       12,421      11,480
   Shares outstanding...............................        3,127        2,882       2,857        1,345       1,323

Selected Average Balances
   Total assets.....................................      354,164      299,167     259,799      203,703     131,079
   Loans............................................      276,733      234,031     204,436      150,691      95,353
   Securities.......................................       50,933       40,462      34,393       33,192      23,862
   Earning assets...................................      333,777      280,884     243,038      191,540     123,663
   Deposits.........................................      290,961      241,933     206,787      175,025     110,745
   Long-term borrowings.............................       34,017       33,028      29,024       12,798       6,649
   Shareholders' equity.............................       22,454       19,821      15,045       11,950       8,925
   Shares outstanding - basic.......................        2,980        2,860       2,755        2,652       2,333

Ratios
   Return on average assets.........................         0.75%        0.85%       0.63%        0.62%       0.92%
   Return on average equity.........................        11.88        12.80       10.83        10.59       13.50
   Net interest spread..............................         3.32         3.75        3.39         3.52        3.76
   Total capital....................................         8.59         8.32        8.25         7.41        7.88
   Tier 1 capital...................................         7.54         7.16        7.22         6.34        6.64
   Leverage ratio...................................         6.07         5.87        5.72         5.22        4.99
   Average equity to average assets.................         6.34         6.63        5.79         5.87        6.80
</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,  which begin on page 31 of 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 in general.  The words
"expect,"  "anticipate,"  "intend," "plan,"  "believe,"  "seek,"  "estimate" and
similar  expressions are intended to identify such  forward-looking  statements;
however, this Report also contains other forward-looking  statements in addition
to historical information. 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 and Union  Counties,  (iii)
rapid fluctuations in interest rates, (iv) the inability of the Bank (as defined
herein)  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 $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 Company's  net income of  $1,629,431  for the year ended
December 31, 2000, represented an increase of $363,657 or 28.7%. 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 $0.90 ($0.84 on a diluted  basis) in 2002,
compared to $0.89 ($0.82 on a diluted basis) in 2001,  $0.59 ($0.55 on a diluted
basis) in 2000,  and $0.48  ($0.44 on a diluted  basis)  per share net income in
1999. Return on average assets, which reflects the Bank's ability to utilize its
assets,  was 0.75% in 2002,  compared to 0.85% in 2001, 0.63% in 2000, and 0.62%
in 1999.  Return on average  shareholders'  equity  decreased to 11.88% in 2002,
compared to 12.80% in 2001,  10.83% in 2000,  and 10.59% in 1999. The decline in
this  ratio  is due in large  part to  continued  growth  and  expansion  in the
Company.

     The Company plans to continue its objectives of  maintaining  asset quality
and providing superior service to its customers. Our 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.

                                       13
<PAGE>

Financial Condition

     Earning Assets

     The Bank's earning assets,  which include deposits in other banks,  federal
funds sold,  securities and loans,  averaged  $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,
                                                                     ----------------------------------------------
                                                                         2002             2001            2000
                                                                     -------------   -------------   --------------
<S>                                                                           <C>             <C>              <C>
Deposits in other banks.........................................              0.30%           0.14%            0.21%
Federal funds sold..............................................              1.53            2.13             1.52
Investment securities...........................................             15.26           14.41            14.15
Loans...........................................................             82.91           83.32            84.12
</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,
                                                                           ----------------------------------------
                                                                               2002          2001          2000
                                                                           -----------   -----------    -----------
                                                                                        (In thousands)
<S>                                                                        <C>           <C>            <C>
Interest-bearing deposits with banks....................................   $     8,399   $       746    $        25
Securities..............................................................        40,375        49,394         32,541
Federal funds sold......................................................         7,756         3,214          6,573
Loans:
   Real estate..........................................................       238,768       202,107        158,775
   Commercial and other.................................................        59,295        48,462         55,349
                                                                           -----------   -----------    -----------
     Total loans........................................................       298,063       250,569        214,124
                                                                           -----------   -----------    -----------

Interest-earning assets ................................................   $   354,593   $   303,923    $   253,263
                                                                           ===========   ===========    ===========
</TABLE>

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

     Federal Funds Sold

     Management  maintains  federal  funds sold as a tool in managing  its daily
cash needs. Federal funds sold at December 31, 2002 and 2001 were $7,756,000 and
$3,214,000,  respectively. Average federal funds sold for 2002 was approximately
$5,104,000,  or 1.53% of average earning assets, and for 2001, was approximately
$6,004,000, or 2.13% of average earning assets. The increase in year-end federal
funds  resulted  from the sale of  securities as well as an increase in customer
deposits related to the opening of an office in Blue Ridge, Georgia.

     Securities Portfolio

     In  the  past,   the  Bank  has   classified   its   securities  as  either
available-for-sale   or   held-to-maturity.   However,   during  2000  the  Bank
reclassified  all  its  held-to-maturity  securities  to the  available-for-sale
portfolio.  At December  31, 2001,  $49,393,717  of the Bank's  securities  were
classified as available-for-sale, while at December 31, 2002, $40,374,902 of the
Bank's securities were classified as available-for-sale.

                                       14
<PAGE>

     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
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.  During 2001,  gross securities
sales were $7,777,064 and maturities  were  $19,540,135  representing  19.2% and
48.3%, respectively, of the average portfolio for the year. Net gains associated
with sales and maturities  totaled  $146,976 in 2001.  Gross unrealized gains in
the  portfolio  amounted  to $386,780 at  year-end  2001 and  unrealized  losses
amounted to $294,626.

     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  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>
<CAPTION>

                              Securities Portfolio

                                                                                      December 31,
                                                                     ----------------------------------------------
                                                                         2002             2001            2000
                                                                     -------------   -------------   --------------
                                                                                     (In thousands)

Securities Available-for-Sale:
<S>                                                                  <C>             <C>             <C>
   U.S. treasury and government agencies........................     $       8,579   $      14,691   $       16,558
   Mortgage-backed securities...................................            14,759          19,340            6,149
   State and municipal securities...............................            15,314          13,805            8,276
   Equity securities............................................             1,723           1,558            1,558
                                                                     -------------   -------------   --------------

     Total......................................................     $      40,375   $      49,394   $       32,541
                                                                     =============   =============   ==============
</TABLE>

     In 2002, average taxable  securities were 68.2% of the portfolio,  compared
to 69.7% in 2001 and 77.4% in 2000. The increase in tax exempt  securities  from
2001 to 2002 reflects the Bank's  intent to reduce the effect of federal  income
taxation.

     The maturities and weighted  average yields of the  investments in the 2002
portfolio  of  securities  are  presented  below.  The  average  maturity of the
securities  portfolio  is 3.8 years  with an  average  yield of  5.59%.  Taxable
equivalent  adjustments  (using  a 34  percent  tax  rate)  have  been  made  in
calculating yields on tax-exempt obligations.

<TABLE>
<CAPTION>
                                             Security Portfolio Maturity Schedule

                                                                       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......   $  4,614     5.39%     $  2,050     4.20%     $  1,915     6.00%     $     --     0.00%
   Mortgage-backed...............      4,079     3.04         6,777     4.12         3,903     4.23            --     0.00
   State and municipal...........        104     5.30         1,732     7.10         3,019     7.28        10,459     7.53
   Equity securities.............         --     0.00            --     0.00            --     0.00         1,723     5.22
                                    --------               --------               --------               --------

Total Securities.................   $  8,797     4.30      $ 10,559     4.62      $  8,837     5.66      $ 12,182     7.20
                                    ========               ========               ========               ========
</TABLE>
                                       15
<PAGE>

     There were no securities  held by the Company of which the aggregate  value
on December 31, 2002 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 made up the  largest  component  of the  Bank's  earning  assets.  At
December 31, 2002, the Bank's total loans were  $298,063,055,  compared to total
loans of $250,569,296 at the end of 2001. In 2002, average net loans represented
82.9% of average earning assets and 78.1% of total average assets, while in 2001
average net loans represented 83.3% of average earning assets and 78.2% of total
average  assets.  This was the result of  continued  strong  loan demand and the
expansion of the loan  production  office in Blue Ridge,  Georgia.  The ratio of
total loans to total deposits was 94.2% in 2002 and 94.9% in 2001.

     The following table shows the  classification of loans by major category at
December 31, 2002, and for each of the preceding four years.
<TABLE>
<CAPTION>
                                                                    Loan Portfolio

                                                                         December 31,
                           --------------------------------------------------------------------------------------------------------
                                  2002                 2001                  2000                  1999                 1998
                           ------------------   ------------------    ------------------    ------------------   ------------------
                                     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........ $  33,449    11.2%   $  29,092    11.6%    $  36,320    17.0%     $  35,375    20.9%  $  26,883    20.7%
Real estate - construction    73,242    24.6       54,255    21.7        22,057    10.3         13,941     8.2       8,543     6.6
Real estate - other (1)...   165,526    55.5      147,852    59.0       136,718    63.8        103,413    61.2      78,965    60.8
Consumer..................    20,296     6.8       19,370     7.7        17,254     8.1         15,026     8.9      13,743    10.6
Other loans...............     5,550     1.9           --     0.0         1,775     0.8          1,351     0.8       1,697     1.3
                           ---------  ------    ---------  ------     ---------  ------      ---------  ------   ---------  ------
                             298,063   100.0%     250,569   100.0%      214,124   100.0%       169,106   100.0%    129,831   100.0%
                                      ======               ======                ======                 ======              ======
Allowance for loan losses     (3,238)              (2,995)               (2,211)                (1,849)             (1,686)
                           ---------            ---------             ---------              ---------           ---------

Net loans................. $ 294,825            $ 247,574             $ 211,913              $ 167,257           $ 128,145
                           =========            =========             =========              =========           =========
<FN>
(1)  The "real estate - other" category includes multi-family residential,  home
     equity,  commercial  real estate and undeveloped  agricultural  real estate
     loans.
</FN>

</TABLE>

     The  following  table shows the  maturity  distribution  of  selected  loan
classifications at December 31, 2002, and an analysis of these loans maturing in
over one year.
<TABLE>
<CAPTION>
                                        Selected Loan Maturity and Interest Rate Sensitivity

                                                                                        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............  $    17,227   $    14,293  $     1,928  $    33,449  $       8,196  $        8,025
Real estate - construction.....       60,120        11,695        1,427       73,242          9,020           4,102
                                 -----------   -----------  -----------  -----------  -------------  --------------

   Total.......................  $    77,347   $    25,988  $     3,355  $   106,691  $      17,216  $       12,127
                                 ===========   ===========  ===========  ===========  =============  ==============
</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.

                                       16
<PAGE>

     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
$3,237,898  in the  allowance  for loan losses at December 31,  2002,  (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  following  table sets forth  certain  information  with respect to the
Bank's loans, net of unearned income, and the allowance for loan losses for each
of the last five years:
<TABLE>
<CAPTION>
                                       Analysis of Loan Loss Experience

                                                                           December 31,
                                               --------------------------------------------------------------------
                                                  2002          2001           2000          1999          1998
                                               -----------   -----------   -----------   -----------    -----------
                                                               (Amounts in thousands, except ratios)
<S>                                            <C>           <C>            <C>           <C>            <C>
Allowance for loan losses at beginning of year $     2,995   $     2,211    $    1,849    $    1,686     $      930
Adjustment of business acquisition..........            --            --            --            --            557
Loans charged off:
   Commercial, financial, and agricultural..            89           240           404           461             32
   Real estate-construction.................            50            --            --            --             --
   Real estate - other......................           427           134            49            22             --
   Consumer.................................           250           170           138           278            104
                                               -----------   -----------   -----------   -----------    -----------
     Total loans charged off................           816           544           591           761            136
                                               -----------   -----------   -----------   -----------    -----------
Recoveries on loans previously charged off:
   Commercial, financial, and agricultural..             5             8             9            15              6
   Real estate-construction.................            --            --            --            --             --
   Real estate-other........................            --             6            --            --             --
   Consumer.................................            26            20            22            29             29
                                               -----------   -----------   -----------   -----------    -----------
Total recoveries on loans
       previously charged off...............            31            34            31            44             35
                                               -----------   -----------   -----------    ----------    -----------
Net loans charged off.......................           785           510           560           717            101
                                               -----------   -----------   -----------   -----------    -----------
Provision for loan losses...................         1,028         1,294           922           880            300
                                               -----------   -----------   -----------   -----------    -----------
Allowance for loan losses, at end of period.   $     3,238   $     2,995   $     2,211   $     1,849    $     1,686
                                               ===========   ===========   ===========   ===========    ===========
Loans, net of unearned income, at end
    of period...............................   $  298,063    $   250,569   $   214,124    $  169,106    $   129,831
                                               ===========   ===========   ===========    ==========    ===========
Average loans, net of unearned income,
outstanding for the period..................   $   276,733   $   234,031   $   204,436   $   150,691    $    95,353
                                               ===========   ===========   ===========   ===========    ===========
Ratios:
Allowance at end of period to loans, net of
   unearned income..........................          1.09%          1.20%         1.03%         1.09%         1.30%
Allowance at end of period to average loans,
   net of unearned income...................          1.17           1.28          1.08          1.23          1.77
Net charge-offs to average loans, net of
   unearned income..........................          0.28           0.22          0.27          0.48          0.11
Net charge-offs to allowance at end of period        24.24          17.03         25.33         38.78          5.99
Recoveries to prior year charge-offs........          5.70           5.75          4.07         32.35         15.42
</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.

                                       17
<PAGE>
     Management allocated the allowance for loan losses to specific loan classes
as follows:
<TABLE>
<CAPTION>
                                                      Allocation of Allowance for Loan Losses
                                                                         December 31,
                         ---------------------------------------------------------------------------------------------------------
                                2002                  2001                  2000                  1999                  1998
                         -----------------     -----------------     -----------------     -----------------     -----------------
                                   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...  $  1,615       11%     $   807       12%    $    387       17%    $    349       21%    $    421       21%
  Real estate -
    construction.......        85       25          193       22          199       10          152        8          118        6
  Real estate - other       1,044       55        1,760       59        1,381       64        1,120       61          894       61
  Consumer.............       168        7          235        7          244        8          228        9          253       11
  Other................       326        2           --        0           --        1           --        1           --        1
                         --------  -------     --------  -------     --------  -------     --------  -------     --------  -------
    Total...........     $  3,238      100%    $  2,995      100%    $  2,211      100%    $  1,849      100%    $  1,686      100%
                         ========  =======     ========  =======     ========  =======     ========  =======     ========  =======
<FN>
(1)  The Bank had no foreign loans.
</FN>
</TABLE>
     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, 2002, 2001, 2000, 1999,
and  1998 of  approximately  $6,143,000,  $1,787,000,  $556,000,  $368,000,  and
$27,000, respectively.

     The following table presents information concerning outstanding balances of
nonperforming  assets at December 31, 2002,  and for each of the preceding  four
years.
<TABLE>
<CAPTION>
                                                   Nonperforming Assets

                                                                           December 31,
                                               --------------------------------------------------------------------
                                                  2002          2001           2000          1999          1998
                                               -----------   -----------   -----------   -----------    -----------
                                                               (Amounts in thousands, except ratios)
<S>                                            <C>           <C>           <C>           <C>            <C>
Nonaccruing loans ..........................   $     4,823   $     1,642   $       385   $       344    $         4
Loans past due 90 days or more..............           334            12            24            24             23
Restructured loans..........................            --            --            --            --             --
                                               -----------   -----------   -----------   -----------    -----------
   Total nonperforming loans................         5,157         1,654           409           368             27
Nonaccruing securities......................            --            --            --            --             --
Other real estate...........................           986           133           147            --             --
                                               -----------   -----------   -----------   -----------    -----------
   Total nonperforming assets...............   $     6,143   $     1,787   $       556   $       368    $        27
                                               ===========   ===========   ===========   ===========    ===========
Ratios:
   Loan loss allowance to total
      nonperforming assets..................          0.53          1.68          3.98          5.02          62.44
                                               ===========   ===========   ===========   ===========    ===========
   Total nonperforming loans to total loans
     (net of unearned interest).............          1.73%         0.66%         0.26%         0.22%         0.02%
                                               ===========   ===========   ===========   ===========    ==========
   Total nonperforming assets
      to total assets.......................          1.60%         0.56%         0.21%         0.16%         0.01%
                                               ===========   ===========   ===========   ===========    ==========
</TABLE>

                                       18
<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,  2002,  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  20.3%,  from   approximately
$241,933,000  in 2001 to  approximately  $290,961,000  in 2002.  At December 31,
2002,  total  deposits were  $316,282,756,  of which  $294,385,698  (93.1%) were
interest  bearing.  At December 31, 2001, total deposits were  $264,028,007,  of
which  $247,194,423  (93.6%) were interest  bearing,  and, at December 31, 2000,
total deposits were $214,168,823,  of which  $205,268,008  (95.8%) 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.

     The average amounts of, and the average rate paid on, each of the following
categories of deposits,  for the years ended  December 31, 2002,  2001 and 2000,
are as follows:
<TABLE>
<CAPTION>
                                                                Years ended December 31,
                                      -----------------------------------------------------------------------------
                                                2002                      2001                       2000
                                      ------------------------  ------------------------  -------------------------
                                        Amount        Rate         Amount        Rate        Amount        Rate
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                                                 (Dollars in thousands)

<S>                                   <C>                <C>    <C>                <C>    <C>                <C>
Noninterest-bearing demand deposits.  $    19,549        0.00%  $   13,972         0.00%  $    10,715        0.00%
Demand..............................       62,492        1.93       39,100         2.55        47,011        4.22
Savings.............................       41,359        1.72       35,513         3.03        28,628        4.29
Time deposits.......................      167,561        4.44      153,348         6.02       120,433        6.40
                                      -----------               ----------                -----------
   Total interest-bearing deposits..      271,412        3.45      227,961         4.95       196,072        5.57
                                      -----------               ----------                -----------
   Total average deposits...........  $   290,961        3.21   $  241,933         4.67   $   206,787        5.28
                                      ===========               ==========                ===========
</TABLE>
     The  two  categories  of  lowest  cost  deposits  comprised  the  following
percentages of average total deposits during 2002:  average  noninterest-bearing
demand deposits,  6.72 percent; and average savings deposits,  14.21 percent. Of
average time  deposits,  approximately  32.95  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, 2002, 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.....................................................................   $       10,064
         Over three through six months............................................................           13,493
         Over six through twelve months...........................................................           22,482
         Over twelve months.......................................................................           14,494
                                                                                                     --------------
              Total...............................................................................   $       60,533
                                                                                                     ==============
</TABLE>
                                       19

<PAGE>
     Repurchases

     Securities  sold under  agreements to repurchase  amounted to $5,928,624 at
December 31, 2002,  compared to $1,732,699 at December 31, 2001,  and $2,845,355
at December 31, 2000. The weighted average rates were 1.60%, 3.20% and 3.94% for
2002,  2001  and  2000,  respectively.   Securities  sold  under  agreements  to
repurchase  averaged   $4,061,294  during  2002,   $1,930,051  during  2001  and
$2,522,820  during 2000. The maximum amount  outstanding at any month end during
2002 was $5,928,624, during 2001 was $3,144,208, and during 2000 was $3,117,584.
The total 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 $-0- at year-end 2002, and $1,932,000 at year-end 2001,  compared to
$-0- at year-end 2000.

     Long-term Debt

     Borrowed  funds  consist   primarily  of  long-term   debt.  The  Bank  had
$16,000,000 in available lines to purchase Federal Funds, on an unsecured basis,
from  commercial  banks.  The Bank was  approved  to borrow up to  approximately
$57,600,000  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  $27,400,000 at year-end 2002. Long-term debt consisted of various
commitments  with scheduled  maturities from one to six years. In addition,  the
Company has  borrowed  $4.6  million from  another  financial  institution  (See
"Capital Resources: Term Loan" 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, 2002.

<TABLE>
<CAPTION>

                                                   Maturities of Long-term Debt
                                                           (In thousands)

                                                          2003        2004        2005         2006         2007
                                                       ---------   ---------    --------    ----------  -----------

<S>                                                    <C>         <C>          <C>         <C>         <C>
   Interest on indebtedness.........................   $   1,597   $     975    $    830    $      568  $       981
   Repayment of principal...........................      17,100       2,900       4,857         1,857        1,357
                                                       ---------   ---------    --------    ----------  -----------

                                                       $  18,697   $   3,875    $  5,687    $    2,425  $     2,338
                                                       =========   =========    ========    ==========  ===========
</TABLE>

     Shareholders' Equity

     Shareholders'  equity  increased  $5,028,099,  from  December  31,  2001 to
December 31, 2002, due in part to net earnings of $2,668,008 and the increase in
unrealized  gains on securities  available-for-sale  totaling  $388,228,  net of
deferred tax liability. The increase was also a result of the issuance of 11,690
shares of the Common Stock to the Company's  401(k) plan (total  purchase  price
$163,660), the issuance of 180,800 shares of stock through the exercise of stock
options for  $1,021,498,  and the  reissuance  of 52,447  shares of stock out of
treasury stock for $786,705.

     All amounts  presented in this report and in the financial  statements  are
adjusted  to  reflect  the  Stock  Split in  April  2000.  See  ITEM 5,  "Market
Information."

                                       20
<PAGE>

     Return on Equity and Assets

     The following table summarizes certain financial ratios for the Company for
the years ended December 31, 2002, 2001 and 2000.

<TABLE>
<CAPTION>

                                                    Return on Equity and Assets

                                                                                 Year ended December 31,
                                                                     ----------------------------------------------
                                                                         2002             2001            2000
                                                                     -------------   -------------   --------------
<S>                                                                           <C>              <C>             <C>
           Return on average assets.............................              0.75%            0.85%           0.63%
           Return on average equity.............................             11.88            12.80           10.83
           Dividend payout ratio................................              0.00             0.00            0.00
           Average equity to average assets ratio...............              6.34             6.63            5.79
</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
the Common  Stock in  November  1998,  proceeds  of $4.4  million  from a public
offering in 2000,  proceeds of $787  thousand  from a private  offering and $1.0
million  from the  exercise of options in 2002,  and through  the  retention  of
earnings and the sale of Common Stock to the Company's 401(k) plan.

     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.  At December 31, 2002, the balance
on the Term Loan was $4.6 million. Interest on the outstanding amounts under the
Term Loan is 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 is 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,  is due and  payable in a final  installment  on March 31,
2010.  The Term  Loan  contains  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.

     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
risk-based  capital  ratios.  The Company's  Tier 1 capital,  which  consists of
common equity,  paid-in capital and retained earnings (less intangible  assets),
amounted  to $23.1  million at  December  31,  2002.  Tier 2 capital  components
include  supplemental  capital components such as qualifying  allowance for loan
losses and qualifying subordinated debt. Tier 1 capital, plus the Tier 2 capital
components,  is referred to as Total  Capital and was $26.3  million at year-end
2002. The Company's percentage ratios as calculated under regulatory  guidelines
were 7.54% and 8.59% for Tier 1 and Total  Capital,  respectively,  at  year-end
2002. 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, 2002,  the  Company's  leverage  ratio was 6.07%,
exceeding the regulatory minimum requirement of 4%.

                                       21

<PAGE>

     The table below illustrates the Company's  regulatory  capital ratios under
federal guidelines at December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>

                             Capital Adequacy Ratios

                                                             Statutory             Years ended December 31,
                                                                           ----------------------------------------
                                                              Minimum          2002          2001          2000
                                                            ------------   -----------   -----------    -----------
                                                                          (Amounts in thousands, except percentages)
<S>    <C>                                                                 <C>           <C>            <C>
  Tier 1 Capital..........................................                 $    23,089   $    18,538    $    15,563

  Tier 2 Capital..........................................                       3,238         2,995          2,211
                                                                           -----------   -----------    -----------

  Total Qualifying Capital................................                 $    26,327   $    21,533    $    17,774
                                                                           ===========   ===========    ===========

  Risk Adjusted Total Assets (including
  off-balance-sheet exposures)............................                 $   306,405   $   256,985    $   215,521

  Tier 1 Risk-Based Capital Ratio.........................       4.0%             7.54          7.16%          7.22%

  Total Risk-Basked Capital Ratio.........................       8.0              8.59          8.32           8.25

  Leverage Ratio..........................................       4.0              6.07          5.87           5.72

</TABLE>

     DBF Capital  Requirement.  In addition to the capital  standards imposed by
federal  banking  regulators,  the DBF imposes a 6% primary capital ratio on the
Bank.  The DBF's  standard is  calculated  as the ratio of total equity to total
assets,  each as adjusted  for  unrealized  gains and losses on  securities  and
allowances for loan losses.  At December 31, 2002, the Bank's capital ratio,  as
calculated under the DBF standard, was 7.45%.

     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 2002, the
Bank did not pay a dividend 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  $77.3 million or 25.8% of the
total loan portfolio at December 31, 2002, and investment securities maturing in
one year or less equaled $8.8 million or 21.8% of the  portfolio.  Other sources
of liquidity include short-term investments such as federal funds sold.

     The  liability  portion of the balance  sheet  provides  liquidity  through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of fiscal  2002,  funds were also  available  through  the  purchase  of
federal funds from correspondent  commercial banks from available lines of up to
an aggregate of $16,000,000.

     In an effort to maintain  and improve the  liquidity  position of the Bank,
management  made  application  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

                                       22

<PAGE>

loans.  The Bank's  credit line stands at  $57,583,823  as of December 31, 2002.
This line is subject to  collateral  availability.  At December  31,  2002,  the
outstanding  balance of the Bank's credit line was  $30,135,714.  See Note 12 to
the Notes to Consolidated Financial Statements herein.

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  following  tables  show  interest  rate  sensitivity  gaps  for  these
different intervals as of December 31, 2002.

<TABLE>
<CAPTION>

                                               Interest Rate Sensitivity Analysis

                                         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............................  $    18,574  $    24,524  $   101,548  $   129,561  $    19,033   $   293,240
   Securities:
     Taxable........................           --        2,127        6,566        8,827        7,541        25,061
     Tax-exempt.....................           --           --          104        1,732       13,478        15,314
   Time deposits in other banks.....        8,399           --           --           --           --         8,399
   Federal funds sold...............        7,756           --           --           --           --         7,756
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                           34,729       26,651      108,218      140,120       40,052       349,770
                                      -----------  -----------  -----------  -----------  -----------   -----------
Interest-bearing liabilities (2)
   Demand deposits (3)..............       27,513       27,512       27,512           --           --        82,537
   Savings deposits (3).............       13,741       13,740       13,740           --           --        41,221
   Time deposits....................       11,570       23,321       99,494       36,243           --       170,628
   Other short-term borrowings......        5,929           --           --           --           --         5,929
   Long-term debt...................        2,100        7,150       11,793        8,343        5,350        34,736
                                      -----------  -----------  -----------  -----------  -----------   -----------
                                           60,853       71,723      152,539       44,586        5,350       335,051
                                      -----------  -----------  -----------  ------------------------   -----------

Interest sensitivity gap............  $   (26,124) $   (45,072) $   (44,321) $    95,534  $    34,702   $    14,719
                                      ===========  ===========  ===========  ===========  ===========   ===========

Cumulative interest sensitivity gap.  $   (26,124) $   (71,196) $  (115,517) $   (19,983) $    14,719
                                      ===========  ===========  ===========  ===========  ===========

Ratio of interest-earning assets to
   interest-bearing liabilities.....         0.57         0.37          0.71         3.14         7.49
                                      ===========  ===========  ============ ============ ============

Cumulative ratio....................         0.57         0.46          0.59         0.94         1.04
                                      ===========  ===========  ============ ============ ============

Ratio of cumulative gap to total
   interest-earning assets..........        (0.07)       (0.20)        (0.33)       (0.06)        0.04
                                      ===========  ===========  ============ ============ ============
<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  earning
liabilities over  interest-bearing  assets of approximately $26 million. For the
first  365  days,   interest-bearing   liabilities   exceed  earning  assets  by
approximately

                                       23

<PAGE>

$116 million.  During this one-year  time frame,  85.1% of all  interest-bearing
liabilities  will  reprice  compared  to 39.6% 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.

Results of Operations

     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  $531,334 or 4.7% to $11,956,632
at December  31,  2002,  compared to  $11,424,991  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  7.8% to  $20,442,148 in 2002,
compared to $22,168,850 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 $815,767 to $1,200,993 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
4.07% 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
3.32% in 2002, compared to 3.75% in 2001.


              [The remainder of this page intentionally left blank]

                                       24
<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>
<CAPTION>
                                     Average Balances, Interest Income/Expense and Yields/Rates
                                                     Taxable Equivalent Basis

                                                           Years Ended December 31,
                          -------------------------------------------------------------------------------------------------
                                       2002                             2001                              2000
                          -------------------------------  -------------------------------  -------------------------------
                                      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).......  $ 276,733  $  20,442      7.39%  $ 234,031  $  22,168      9.47%  $ 204,436  $  19,633      9.60%
     Securities:
       Taxable..........     34,718      1,647      4.74      28,212      1,743      6.18      26,632      1,703      6.39
       Tax-exempt.......     16,215      1,201      7.41      12,250        816      6.66       7,761        649      8.36
                          ---------   --------             ---------  ---------             ---------  ---------
     Total securities...     50,933      2,848      5.59      40,462      2,559      6.32      34,393      2,352      6.84

     Interest-bearing
       deposits.........      1,007         13      1.29         387          5      1.29         515         30      5.83
     Federal funds sold.      5,104         79      1.55       6,004        367      6.11       3,694        208      5.63
                          ---------   --------             ---------  ---------             ---------  ---------
       Total interest-
        earning assets (2)  333,777     23,382      7.01     280,884     25,099      8.94     243,038     22,223      9.14

   Non interest-earning assets:
     Cash and due from banks  6,909                            5,190                            3,849
     Premises and equipment   7,835                            6,791                            5,783
     Accrued interest and
       other assets.....      8,790                            8,889                            9,274
     Allowance for
       loan losses......     (3,147)                          (2,587)                          (2,145)
                          ---------                        ---------                        ---------
Total assets............  $ 354,164                        $ 299,167                        $ 259,799
                          =========                        =========                        =========
Liabilities and
   Shareholders' Equity
   Interest-bearing liabilities:
     Demand deposits....  $  62,492      1,209      1.93%  $  39,100        996      2.55%  $  47,011      1,983      4.22%
     Savings deposits...     41,359        712      1.72      35,513      1,075      3.03      28,628      1,227      4.29
     Time deposits......    167,561      7,432      4.44     153,348      9,224      6.02     120,433      7,710      6.40
                          ---------   --------             ---------  ---------             ---------  ---------
       Total deposits...    271,412      9,353      3.45     227,961     11,295      4.95     196,072     10,920      5.57

   Other short-term
     borrowings.........      4,667         77      1.65       2,278        100      4.39       6,860        389      5.67
   Long-term debt.......     34,017      1,995      5.86      33,028      2,280      6.90      29,024      2,017      6.95
                          ---------   --------             ---------  ---------             ---------  ---------
       Total interest-
         bearing
         liabilities....    310,096     11,425      3.68     263,267     13,675      5.19     231,956     13,326      5.75
                          ---------   --------             ---------  ---------             ---------  ---------  ---------
   Noninterest-bearing liabilities:
     Demand deposits....     19,549                           13,972                           10,715
     Accrued interest and
       other liabilities      2,065                            2,107                            2,083
     Shareholders' equity    22,454                           19,821                           15,045
                          ---------                        ---------                        ---------
Total liabilities and
   shareholders' equity.  $ 354,164                        $ 299,167                        $ 259,799
                          =========                        =========                        =========
Net interest income/net
   interest spread......                11,957      3.32%                11,424      3.75%                 8,897      3.39%
                                      ========  ========              =========                        =========
Net yield on earning assets                         3.58%                            4.07%                            3.67%
                                                ========                         =========                        =========
Taxable equivalent adjustment:
   Loans................                    57                               57                               30
   Investment securities                   411                              279                              222
                                      --------                        ---------                        ---------
     Total taxable
       equivalent adjustment               468                              336                              252
                                      --------                        ---------                        ---------
Net interest income.....              $ 11,489                        $  11,088                        $   8,645
                                      ========                        =========                        =========
<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>

                                       25
<PAGE>
     The following tables set forth, for the years ended December 31, 2002, 2001
and 2000,  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>
<CAPTION>
                                                        Rate/Volume Variance Analysis
                                                           Taxable Equivalent Basis

                                     Average Volume                   Change in Volume                 Average Rate
                             ----------------------------------   --------------------------   ----------------------------
                                2002        2001        2000       2002-2001      2001-2000      2002      2001      2000
                             ----------  ----------  ----------   -----------    -----------   --------  --------  --------
Earning assets:                                              (Dollars in thousands)
Loans, net of
<S>                <C>       <C>         <C>         <C>          <C>            <C>              <C>       <C>       <C>
   unearned income (1).....  $  276,733  $  234,031  $  204,436   $    42,702    $    29,595      7.39%     9.47%     9.60%
Investment Securities:
   Taxable.................      34,718      28,212      26,632         6,506          1,580      4.74      6.18      6.39
   Tax exempt..............      16,215      12,250       7,761         3,965          4,489      7.41      6.66      8.36
                             ----------  ----------  ----------   -----------    -----------
     Total investment
       securities..........      50,933      40,462      34,393        10,471          6,069      5.59      6.32      6.84
                             ----------  ----------  ----------   -----------    -----------
Interest-bearing deposits
   with other banks........       1,007         387         515           620           (128)     1.29      1.29      5.83
Federal funds sold.........       5,104       6,004       3,694          (900)         2,310      1.55      6.11      5.63
                             ----------  ----------  ----------   -----------    -----------
     Total earning assets..  $  333,777  $  280,884  $  243,038   $    52,893    $    37,846      7.01      8.94      9.14
                             ==========  ==========  ==========   ===========    ===========
Interest-bearing liabilities:
Deposits:
   Demand..................  $   62,492  $   39,100  $   47,011   $    23,392    $    (7,911)     1.93      2.55      4.22
   Savings.................      41,359      35,513      28,628         5,846          6,885      1.72      3.03      4.29
   Time....................     167,561     153,348     120,433        14,213         32,915      4.44      6.02      6.40
                             ----------  ----------  ----------   -----------    -----------
     Total deposits........     271,412     227,961     196,072        43,451         31,889      3.45      4.95      5.57

Other short-term
   borrowings..............       4,667       2,278       6,860         2,389         (4,582)     1.65      4.39      5.67
Long-term debt.............      34,017      33,028      29,024           989          4,004      5.86      6.90      6.95
                             ----------  ----------  ----------   -----------    -----------
     Total interest-bearing
       liabilities.........  $  310,096  $  263,267  $  231,956   $    46,829    $    31,311      3.68      5.19      5.75
                             ==========  ==========  ==========   ===========    ===========
Net interest income/net interest spread                                                           3.32      3.75      3.39
Net yield on earning assets                                                                       3.58      4.07      3.67
Net cost of funds..........                                                                       3.42      4.87      5.48
</TABLE>
<TABLE>
<CAPTION>

                                     Interest                                              Variance Attributed to (1)
                                                                                    --------------------------------------
                                  Income/Expense                  Variance                 2002                2001
                           ----------------------------   ------------------------  ------------------  ------------------
                             2002      2001      2000      2002-2001    2001-2000    Volume     Rate     Volume     Rate
                           --------  --------  --------   -----------  -----------  --------  --------  --------  --------
                                                                    (Dollars in thousands)
Earning assets:
  Loans, net of
<S>                        <C>       <C>       <C>        <C>          <C>          <C>       <C>        <C>      <C>
   unearned income.......  $ 20,442  $ 22,168  $ 19,633   $    (1,726) $     2,535  $  3,627  $ (5,353)  $ 2,804  $   (269)
Investment Securities:
  Taxable................     1,647     1,743     1,703           (96)          40       357      (453)       98       (58)
  Tax exempt.............     1,201       816       649           385          167       285       100       319      (152)
                           --------  --------  --------   -----------  -----------  --------  --------  --------  --------
   Total investment
     securities..........     2,848     2,559     2,352           289          207       642      (353)      417      (210)
                           --------  --------  --------   -----------  -----------  --------  --------  --------  --------
Interest-bearing deposits
  with other banks.......        13         5        30             8          (25)        8        --        (6)      (19)
Federal funds sold.......        79       367       208          (288)         159       (48)     (240)      140        19
                           --------  --------  --------   -----------  -----------  --------  --------  --------  --------
   Total earning assets..    23,382    25,099    22,223        (1,717)       2,876     4,229    (5,946)    3,355      (479)
                           --------  --------  --------   -----------  -----------  --------  --------  --------  --------
Interest-bearing liabilities:
Deposits:................
  Demand.................     1,209       996     1,983           213         (987)      495      (282)     (294)     (698)
  Savings................       712     1,075     1,227          (363)        (152)      157      (520)      256      (408)
  Time...................     7,432     9,224     7,710        (1,792)       1,514       804    (2,596)    1,996      (482)
                           --------  --------  --------   -----------  -----------  --------  --------  --------  --------
   Total deposits........     9,353    11,295    10,920        (1,942)         375     1,456    (3,398)    1,958    (1,588)
Other short-term
   borrowings............        77       100       389           (23)        (289)       64       (87)     (216)      (73)
Long-term debt...........     1,995     2,280     2,017          (285)         263        66      (351)      278       (15)
                           --------  --------  --------   -----------  -----------  --------  --------  --------  --------
   Total interest-
     bearing liabilities.    11,425    13,675    13,326        (2,250)         349     1,586    (3,836)    2,020    (1,676)
                           --------  --------  --------   -----------  -----------  --------  --------  --------  --------
Net interest income/
  net interest spread...   $ 11,957  $ 11,424  $  8,897   $       533  $     2,527  $  2,643  $ (2,110) $  1,335  $  1,197
                           ========  ========  ========   ===========  ===========  ========  ========  ========  ========
<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>
                                       26
<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  $2,915,035  and  $1,538,001,
respectively.  These amounts are primarily from customer service fees, insurance
commissions and fees on services to customers.  Other operating income increased
from $668,645 in 2001 to  $1,493,225 in 2002,  primarily due to a high volume of
mortgage refinancings due to historically low interest rates.

     Noninterest Expenses

     Noninterest  expenses  totaled  $9,702,148 in 2002,  $7,831,363 in 2001 and
$6,380,487  in 2000.  Salaries and  benefits  increased  $1,012,033  or 27.0% to
$4,755,882 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  $290,471  or  9.3%  to
$3,408,869  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
Insurance.........................................................................           119             144
Data processing...................................................................            84             395
Correspondent bank charges........................................................            78              84
Amortization expense..............................................................            76             118
Checking account expense..........................................................            60              57
Other.............................................................................           714             475
                                                                                     -----------     -----------
   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%.

                                       27
<PAGE>

     Comparison of Years Ended December 31, 2001 and 2000

     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   $2,528,349  or  28.4%  to
$11,424,991  at December 31, 2001,  compared to $8,896,642 at December 31, 2000.
This increase was caused by continued increase in loan demand.

     Interest and fees earned on loans  increased  12.9% to $22,168,850 in 2001,
from  $19,633,417  in 2000.  The increase was  primarily  due to the increase in
volume  of  average  loans,   from   approximately   $204,436,000   in  2000  to
approximately $234,031,000 in 2001.

     Interest earned on taxable securities increased 2.4% to $1,743,440 in 2001,
from  $1,702,529  in 2000,  while  interest  earned  on  non-taxable  securities
increased from $648,461 to $815,767 during the same period.  The variance in the
income figures reflects better management of earnings.

     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 2001 was 4.07%  compared to a net  interest  rate margin of
3.67% in 2000.

     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
3.75% in 2001, compared to 3.39% in 2000.

     During 2001,  interest on federal funds sold  increased  $159,745 or 77.1%,
from 2000. This increase in income is the result of significantly larger average
balances maintained throughout 2001, compared to 2000. Interest on deposits with
other banks decreased to $4,891 in 2001, from $30,363 in 2000.

     Interest Expense

     Total interest expense increased  $349,574 or 2.62% to $13,674,827 in 2001,
from  $13,325,253  in 2000.  This increase was the combined  effect of continued
growth of the  Company.  The average rate paid on  interest-bearing  deposits in
2001 and 2000 was 4.95% and 5.57%,  respectively.  The  effect of these  changes
increased the interest  expense on  interest-bearing  deposits to $11,294,581 in
2001, from $10,919,158 in 2000, an increase of $375,423 or 3.44%.

     Noninterest Income

     Noninterest  income for 2001 and 2000 totaled  $1,538,001  and  $1,158,834,
respectively. These amounts were primarily from customer service fees, insurance
commissions  and fees on services to  customers.  Noninterest  income  increased
primarily  due  to the  continued  growth  in the  Bank's  deposit  base.  Other
operating income increased from $619,911 in 2000 to $668,645 in 2001,  primarily
due to continued growth of the Company.

     Noninterest Expenses

     Noninterest  expenses totaled  $7,831,363 in 2001,  $6,380,486 in 2000, and
$5,560,969  in  1999.  Salaries  and  benefits  increased  $852,919  or 29.5% to
$3,743,849  in  2001,  due to the  Company's  continued  growth  and  expansion.
Occupancy  expenses  totaled  $511,810,  an  increase  of $180,478 or 54.5% from
$331,332 in 2000. Furniture and equipment expenses increased $81,633 or 21.7% in
2001, due to continued growth and expansion.  Other operating expenses increased
$335,847 or 12.1% to $3,118,398 in 2001, due mainly to continued growth.

                                       28
<PAGE>

     The table  below  sets forth the  Company's  noninterest  expenses  for the
periods indicated.

<TABLE>
<CAPTION>

                                                                                       Years ended December 31,
                                                                                     --------------------------
                                                                                        2001             2000
                                                                                     -----------     -----------
                                                                                        (Amounts in thousands)

<S>                                                                                  <C>             <C>
Salaries and employee benefits....................................................   $     3,744     $     2,890
Occupancy expense.................................................................           512             331
Professional and regulatory fees..................................................           469             427
Furniture and equipment expense...................................................           457             376
Advertising.......................................................................           441             418
Director and committee fees.......................................................           412             380
Data processing...................................................................           395             219
Supplies..........................................................................           264             262
Insurance.........................................................................           144             124
Taxes and licenses................................................................           132              50
Postage...........................................................................           127             132
Amortization expense..............................................................           118             118
Correspondent bank charges........................................................            84              59
Checking account expense..........................................................            57              67
Other.............................................................................           475             527
                                                                                     -----------     -----------
   Total..........................................................................   $     7,831     $     6,380
                                                                                     ===========     ===========
</TABLE>

     Income Taxes

     The  Company's  net  operating  income of  $3,500,686  in 2001  resulted in
$962,588 of income tax expense,  which  represents  an income tax rate of 27.5%.
Net  operating  income of  $2,501,209 in 2000 resulted in $871,778 of income tax
expense, which represented an income tax rate of 34.9%.

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.

                                       29

<PAGE>

     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.

<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, 2002

Projected change in:
<S>                                                                                          <C>               <C>
   Interest income..................................................................         (11.43)%          11.57%
   Interest expense.................................................................         (12.18)           13.21
                                                                                      -------------   --------------

   Net interest income..............................................................         (11.04)%          10.70%
                                                                                      =============   ==============
</TABLE>

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".

                                       30
<PAGE>

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.

APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                               Page(s)

<S>                                                                                                              <C>
Independent Auditors' Report................................................................................     32

Consolidated Statements of Financial Condition as of December 31, 2002 and 2001.............................     33

Consolidated Statements of Income for the Years Ended
  December 31, 2002, 2001 and 2000..........................................................................     34

Consolidated Statements of Shareholders' Equity for the Years Ended
  December 31, 2002, 2001 and 2000..........................................................................     35

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2002, 2001 and 2000..........................................................................     36

Notes to Consolidated Financial Statements..................................................................     37

Quarterly Results (Unaudited)...............................................................................     66
</TABLE>

                                       31

<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          David A. Bowers, CPA
W. Ernest Cox, CPA                                          Steven W. Brown, CPA
________________                   * * *                        ________________
M. Bryant King, CPA        Telephone - 205.822.3488        Russell D. Payne, CPA
Steven D. Miller, CPA        Wats - 800.466.3488          Stewart T. Wilson, CPA
Donald Pagan, 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, 2002 and 2001, and the related  consolidated  statements of income,
shareholders'  equity and cash  flows for each of the three  years in the period
ended  December  31,  2002.  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, 2002 and 2001,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended  December 31, 2002,  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 11, 2003

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


          Member of American Institute of Certified Public Accountants,
    SEC Practice Section and Alabama Society of Certified Public Accountants

                                       32
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           December 31, 2002 and 2001

<TABLE>
<CAPTION>

                                                                                          2002              2001
                                                                                    ---------------    ---------------
Assets
<S>                                                                                 <C>                <C>
   Cash and due from banks......................................................    $    14,701,857    $     3,598,304
   Interest-bearing deposits with other banks...................................          8,398,840            745,954
   Federal funds sold...........................................................          7,756,000          3,214,000
                                                                                    ---------------    ---------------
       Cash and Cash Equivalents................................................         30,856,697          7,558,258

   Securities available-for-sale................................................         40,374,902         49,393,717

   Loans, net of unearned income................................................        298,063,055        250,569,296
   Allowance for loan losses....................................................         (3,237,898)        (2,995,362)
                                                                                    ----------------   ---------------
       Net Loans................................................................        294,825,157        247,573,934

   Premises and equipment, net..................................................          8,771,352          6,845,430
   Accrued interest.............................................................          2,240,920          2,498,992
   Cash surrender value on life insurance.......................................          2,483,243          2,369,866
   Intangibles, net.............................................................          2,081,264          1,991,891
   Other assets.................................................................          2,390,550          1,446,923
                                                                                    ---------------    ---------------
       Total Assets.............................................................    $   384,024,085    $   319,679,011
                                                                                    ===============    ===============

Liabilities and Shareholders' Equity
Liabilities
   Deposits:
     Noninterest-bearing........................................................    $    21,897,058    $    16,833,584
     Interest-bearing...........................................................        294,385,698        247,194,423
                                                                                    ---------------    ---------------
       Total Deposits...........................................................        316,282,756        264,028,007
   Short-term borrowings........................................................          5,928,624          3,664,699
   Accrued interest.............................................................            976,156          1,266,946
   Long-term debt...............................................................         34,735,714         29,653,571
   Other liabilities............................................................            481,546            474,598
                                                                                    ---------------    ---------------
       Total Liabilities........................................................        358,404,796        299,087,821
                                                                                    ---------------    ---------------
Shareholders' Equity
   Common stock, par value $0.01 per share, 20,000,000 shares authorized,
     3,327,160 shares issued in 2002 and 3,134,670 shares issued in 2001........             33,272             31,347
   Paid-in capital..............................................................         16,428,767         14,926,333
   Retained earnings............................................................         10,495,901          7,827,893
   Accumulated other comprehensive income (loss): net unrealized holding
     gains (losses) on securities available-for-sale,
     net of deferred income tax.................................................            449,050             60,822
   Treasury stock, 200,553 and 253,000 shares at cost...........................         (1,787,701)        (2,255,205)
                                                                                    ----------------   ---------------
       Total Shareholders' Equity...............................................         25,619,289         20,591,190
                                                                                    ---------------    ---------------

Total Liabilities and Shareholders' Equity......................................    $   384,024,085    $   319,679,011
                                                                                    ===============    ===============
</TABLE>

                 See notes to consolidated financial statements

                                       33
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>

                                                                       2002               2001              2000
                                                                 ----------------   ---------------    ---------------
Interest Income
<S>                                                              <C>                <C>                <C>
   Interest and fees on loans.................................   $     20,385,750   $    22,111,485    $    19,603,418
 Interest on investment securities:
     Taxable securities.......................................          1,646,592         1,743,440          1,702,529
     Nontaxable securities....................................            790,127           536,689            426,619
   Interest on deposits in other banks........................             13,039             4,891             30,363
   Interest on federal funds sold.............................             78,941           366,870            207,125
                                                                 ----------------   ---------------    ---------------
       Total Interest Income..................................         22,914,449        24,763,375         21,970,054
                                                                 ----------------   ---------------    ---------------

Interest Expense
   Interest on deposits.......................................          9,352,768        11,294,581         10,919,158
   Interest on federal funds purchased and securities sold
     under agreements to repurchase...........................             76,968           100,124            389,080
   Interest on long-term debt.................................          1,995,652         2,280,122          2,017,015
                                                                 ----------------   ---------------    ---------------
       Total Interest Expense.................................         11,425,388        13,674,827         13,325,253
                                                                 ----------------   ---------------    ---------------

Net Interest Income...........................................         11,489,061        11,088,548          8,644,801
   Provision for loan losses..................................          1,028,000         1,294,500            921,940
                                                                 ----------------   ---------------    ---------------

Net Interest Income After Provision For Loan Losses...........         10,461,061         9,794,048          7,722,861

Noninterest Income
   Customer service fees......................................          1,058,298           661,715            504,131
   Insurance commissions......................................             77,987            60,665             45,566
   Other operating income.....................................          1,493,225           668,645            619,911
   Investment securities gains (losses).......................            285,525           146,976            (10,774)
                                                                 ----------------   ---------------    ---------------
       Total Noninterest Income...............................          2,915,035         1,538,001          1,158,834
                                                                 ----------------   ---------------    ---------------

Noninterest Expenses
   Salaries and employee benefits.............................          4,755,882         3,743,849          2,890,930
   Occupancy expense..........................................            615,826           511,810            331,332
   Furniture and equipment expense............................            921,571           457,306            375,673
   Other operating expenses...................................          3,408,869         3,118,398          2,782,551
                                                                 ----------------   ---------------    ---------------
       Total Noninterest Expenses.............................          9,702,148         7,831,363          6,380,486
                                                                 ----------------   ---------------    ---------------

Income before income taxes....................................          3,673,948         3,500,686          2,501,209
Income tax expense............................................          1,005,940           962,588            871,778
                                                                 ----------------   ---------------    ---------------

Net Income....................................................   $      2,668,008   $     2,538,098    $     1,629,431
                                                                 ================   ===============    ===============

Earnings Per Common Share
   Basic.....................................................    $           0.90   $          0.89    $          0.59
   Diluted...................................................                0.84              0.82               0.55

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

Weighted Average Shares Outstanding
   Basic.....................................................           2,979,806         2,859,683          2,755,255
   Diluted...................................................           3,189,108         3,081,276          2,968,926
</TABLE>

                 See notes to consolidated financial statements

                                       34
<PAGE>

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>

                                                                                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, 1999........  $ 6,945,610  $  3,030,196  $  3,660,364   $ (787,396)  $  (428,000) $ 12,420,774

Net income 2000.....................           --            --     1,629,431           --            --     1,629,431
Unrealized gains on available-
   for-sale securities, net of
   reclassification adjustment,
   net of tax of $425,490...........           --            --            --      784,302            --       784,302
                                                                                                          ------------
Comprehensive income................           --            --            --           --            --     2,413,733
                                                                                                          ------------
Purchase of Treasury Stock..........           --            --            --           --    (1,827,205)   (1,827,205)
Change of par value from $5.00
   to $0.01.........................   (6,917,828)    6,917,828            --           --            --            --
Public offering sale of stock, net
   of issuance costs................        3,066     4,359,081            --           --            --     4,362,147
Proceeds from sale of common
   stock to 401(k) plan.............          242       292,596            --           --            --       292,838
Proceeds from exercise of options...           12         7,188            --           --            --         7,200
                                      -----------  ------------  ------------   ----------   -----------  ------------

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

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........       31,347    14,926,333     7,827,893       60,822    (2,255,205)   20,591,190

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........  $    33,272  $ 16,428,767  $ 10,495,901   $  449,050   $(1,787,701) $ 25,619,289
                                      ===========  ============  ============   ==========   ===========  ============
</TABLE>

                 See notes to consolidated financial statements

                                       35
<PAGE>

                APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>

                                                                       2002               2001              2000
                                                                 ----------------   ---------------    ---------------

Operating Activities
<S>                                                              <C>                <C>                <C>
   Net income.................................................   $      2,668,008   $     2,538,098    $    1,629,431
   Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation, amortization, and accretion, net...........          1,171,023           861,950           556,373
     Provision for loan losses................................          1,028,000         1,294,500           921,940
     Deferred tax (benefit) expense...........................            (49,000)         (181,725)          110,343
     Realized security (gains) losses, net....................           (285,525)         (146,976)           10,774
     Loss on disposition of other real estate.................             40,757            47,124                --
     Increase in cash surrender value on life insurance.......           (113,377)         (114,510)         (110,062)
     (Increase) decrease in accrued interest receivable.......            258,072           (44,913)         (712,093)
     (Decrease) increase in accrued interest payable..........           (290,790)          (94,950)          545,908
     Other, net...............................................            (51,421)          183,274           334,278
                                                                 ----------------   ---------------    --------------
       Net Cash Provided By Operating Activities..............          4,375,747         4,341,872         3,286,892
                                                                 ----------------   ---------------    --------------

Investing Activities
   Proceeds from sales of securities available-for-sale.......         12,597,325         7,777,064        10,282,289
   Proceeds from maturity, calls and paydown of
     securities available-for-sale............................         34,322,603        19,540,135         1,151,386
   Purchase of securities available-for-sale..................        (37,442,014)      (44,027,017)       (8,405,098)
   Net increase in loans to customers.........................        (49,462,737)      (37,068,598)      (45,726,054)
   Capital expenditures, net..................................         (2,605,882)         (878,572)       (3,230,277)
   Proceeds from disposition of foreclosed real estate........            236,615            42,715                --
                                                                 ----------------   ---------------    --------------
       Net Cash Used In Investing Activities..................        (42,354,090)      (54,614,273)      (45,927,754)
                                                                 ----------------   ---------------    --------------

Financing Activities
   Net increase in demand deposits, NOW accounts,
     and savings accounts.....................................         45,209,010        17,041,106         1,670,288
   Net increase in certificates of deposit....................          7,045,739        32,818,078        25,768,879
   Net increase (decrease) in short-term borrowings...........          2,263,925           819,344        (3,288,652)
   Issuance of long-term debt.................................         23,000,000                --        38,600,000
   Repayment of long-term debt................................        (17,917,857)       (4,884,524)      (21,026,191)
   Issuance of common stock...................................            889,260           319,689         4,662,185
   Sale of treasury stock.....................................            786,705                --                --
   Purchase of treasury stock.................................                 --                --        (1,827,205)
                                                                 ----------------   ---------------    --------------
       Net Cash Provided By Financing Activities..............         61,276,782        46,113,693        44,559,304
                                                                 ----------------   ---------------    --------------

Net Increase (Decrease) in Cash and Cash Equivalents..........         23,298,439        (4,158,708)        1,918,442

Cash and Cash Equivalents at Beginning of Year................          7,558,258        11,716,966         9,798,524
                                                                 ----------------   ---------------    --------------

Cash and Cash Equivalents at End of Year......................   $     30,856,697   $     7,558,258    $   11,716,966
                                                                 ================   ===============    ==============
</TABLE>

                 See notes to consolidated financial statements

                                       36
<PAGE>

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


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 of
Gilmer  County Bank  simultaneously  changed its name to  Appalachian  Community
Bank.  AIM was formed as a  wholly-owned  subsidiary  of the Bank.  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.

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.

                                       37
<PAGE>

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

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 Possible 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 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.

                                       38
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

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, 2002, 2001 and 2000.

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.

Advertising Costs

The Company's policy is to expense  advertising  costs as incurred.  Advertising
expense  for the years  ended  December  31,  2002,  2001 and 2000  amounted  to
approximately $567,000, $441,000 and $418,000, respectively.

                                       39
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 1 - Summary of Significant Accounting Policies - Continued

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

In October  1995,  the FASB  issued  SFAS No. 123,  Accounting  for  Stock-Based
Compensation;  which  defines a fair value  based  method of  accounting  for an
employee stock option plan. This statement  establishes financial accounting and
reporting standards for stock-based employee  compensation plans and stock-based
non-employee  compensation.  Under the fair value based method,  compensation is
measured  at the grant  date  based on the value of the award and is  recognized
over the service period, which is usually the vesting period.  However, SFAS No.
123 allows an entity to continue to measure  compensation  costs for those plans
using the intrinsic  value based method of accounting  prescribed by APB Opinion
No, 25,  Accounting  for Stock Issued to  Employees.  The Company has elected to
continue its  reporting  of  stock-based  compensation  in  accordance  with the
provisions of APB Opinion No. 25.

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  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 FASB issued  Statement  No. 142,
Goodwill and Other Intangible  Assets,  in June 2001. 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.

As discussed  later in this footnote,  the adoption of new accounting  standards
effective January 1, 2002, mandate the  discontinuance of periodic  amortization
and require 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
assessment  as of December  31,  2002,  indicate  that no  impairment  of values
existed at those dates.

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 become payable.

                                       40
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

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 $16
million  and a  line  of  credit  with  the  Federal  Home  Loan  Bank  of up to
approximately  $57,600,000 of which $27,400,000 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 2001 and 2000 have been reclassified to conform with the 2002
presentation.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting  Standards ("SFAS") No. 133,  Accounting for Derivative
Instruments and Hedging Activities.  This statement  establishes  accounting and
reporting standards for derivative  instruments and for hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities   in  the  statement  of  financial   condition  and  measure  those
instruments  at fair value.  The  accounting  for changes in the fair value of a
derivative  is to be determined  based upon the intended use of the  derivative.
For certain hedge  designations  (cash flow and foreign  currency  exposure) the
derivative's  gain or loss is  reported as a  component  of other  comprehensive
income. Other designations require the gain or loss to be recognized in earnings
in the period of change.  This  statement,  amended as to effective date by SFAS
No. 137, is effective for financial  statements for periods beginning after June
15,  2000.  In June 2000,  the FASB also  issued SFAS No.  138,  Accounting  for
Certain Derivative  Instruments and Certain Hedging Activities - an Amendment of
SFAS No. 133.  The  adoption of SFAS No. 133, as amended by SFAS No. 138 did not
have a material impact on the Company's consolidated financial statements.

In September  2000,  the FASB issued SFAS No. 140,  Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB  Statement  No.  125.  While  SFAS  No.  140  carries  over  most of the
provisions of SFAS No. 125,  Accounting for Transfers and Servicing of Financial
Assets and  Extinguishments  of  Liabilities,  it  provides  new  standards  for
reporting  financial assets  transferred as collateral and new standards for the
derecognition of financial assets, in particular  transactions involving the use
of special purpose entities. SFAS No. 140 also prescribes additional disclosures
for collateral transactions and for securitization transactions accounted for as
sales.  The new collateral  standards and disclosure  requirements are effective
for fiscal years ending after December 15, 2000, while the new standards for the
derecognition  of financial  assets are effective for transfers made after March
31, 2001. The adoption of this  statement did not have a material  effect on the
Company's consolidated financial statements.

In May 2001, the Auditing Standards Board issued Statement on Auditing Standards
("SAS")  No.  94,  The  Effect  of  Information   Technology  on  the  Auditor's
Consideration of Internal Control in a Financial Statement Audit. This statement
amends SAS No. 55,  Consideration of Internal  Control in a Financial  Statement
Audit, by providing  additional  guidance  related to the  understanding  by the
auditor of an entity's use of information technology relevant to the audit. This
auditing  standard is effective for audits of financial  statements  for periods
beginning  on or after  June 1, 2001.  The impact on the audit of the  Company's
consolidated  financial  statements resulting from the issuance of this auditing
standard was not material.

                                       41
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

In June  2001,  the  FASB  issued  SFAS No.  141,  Business  Combinations.  This
statement addresses financial accounting and reporting for business combinations
and supersedes  Accounting  Principles  Board ("APB")  Opinion No. 16,  Business
Combinations,  and SFAS No. 38, Accounting for  Preacquisition  Contingencies of
Purchased  Enterprises.  All business  combinations in the scope of SFAS No. 141
are to be  accounted  for using one method,  the purchase  method.  Prior to the
issuance of this statement,  subject to certain criteria,  business combinations
were accounted for using one of two methods, the pooling-of-interests  method or
the purchase  method.  The two methods  produce  different  financial  statement
results. The single-method approach used in SFAS No. 141 reflects the conclusion
that virtually all business  combinations  are acquisitions and therefore should
be  accounted  for in the same manner as other asset  acquisitions  based on the
values exchanged.  This statement provides expanded and revised guidance related
to the  allocation  of the  purchase  price to  goodwill  and other  intangibles
arising from the business  combination.  The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001.

In June 2001,  the FASB  issued  SFAS No.  142,  Goodwill  and Other  Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other  intangible  assets and  supersedes  APB  Opinion  No. 17,  Intangible
Assets.  SFAS  No.  142  provides  new  standards  for  accounting  relating  to
intangible assets after initial  recognition in the financial  statements.  This
statement   proscribes  the  accounting  practice  of  amortizing  or  expensing
intangibles  ratably over a  prescribed  period of time and imposes new guidance
requiring  that goodwill and certain other  intangibles be tested for impairment
at least  annually by comparing  fair values of those assets with their recorded
amounts. Additional disclosure requirements also are provided. The provisions of
SFAS No. 142 are required to be applied in fiscal years beginning after December
15, 2001.

The adoption of SFAS No. 141 and SFAS No. 142 did not have a material  effect on
the Company's consolidated financial statements.

In June 2001,  the FASB  issued SFAS No. 143,  Accounting  for Asset  Retirement
Obligations.  This statement  requires that the fair value of a liability for an
asset retirement  obligation be recognized in the period in which it is incurred
if a  reasonable  estimate  of fair  value  can be made.  The  associated  asset
retirement  costs  are  capitalized  as  part  of  the  carrying  amount  of the
long-lived  asset.  This statement is effective for financial  statements issued
for fiscal years  beginning  after June 15, 2002. The adoption of this statement
is not  expected  to  have a  material  effect  on  the  Company's  consolidated
financial statements.

In August 2001,  the FASB issued SFAS No. 144,  Accounting for the Impairment or
Disposal of Long-lived Assets. This statement addresses financial accounting and
reporting for the  impairment or disposal of long-lived  assets.  This statement
supersedes  FASB Statement No. 121,  Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be  Disposed  Of, and the  accounting  and
reporting   provisions  of  APB  Opinion  No.  30,   Reporting  the  Results  of
Operations--Reporting  the Effects of  Disposal of a Segment of a Business,  and
Extraordinary,  Unusual and Infrequently Occurring Events and Transactions,  for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends  Accounting  Research  Bulletin No. 51,  Consolidated
Financial  Statements,  to  eliminate  the  exception  to  consolidation  for  a
subsidiary  for  which  control  is likely to be  temporary.  The major  changes
resulting from this statement relate to the establishment of a single method for
the  recognition of impairment  losses on long-lived  assets to be held and used
whether from  discontinuance of a business segment or otherwise.  This statement
is effective for financial  statements  issued for fiscal years  beginning after
December 15, 2001. The adoption of this statement did not have a material effect
on the Company's consolidated financial statements.

                                       42
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 1 - Summary of Significant Accounting Policies - Continued

In December 2001, the Accounting  Standards Executive Committee issued Statement
of Position  ("SOP") 01-6,  Accounting by Certain Entities  (Including  Entities
With Trade  Receivables) That Lend to or Finance the Activities of Others.  This
statement  reconciles  and  conforms  the  accounting  and  financial  reporting
provisions for similar  transactions as applied to different entities within the
financial services industry.  It eliminates  differences in disclosure practices
where not  warranted  and should  provide  greater  consistency  in reporting by
entities in the financial  services  industry.  This  statement is effective for
annual and interim financial  statements issued for fiscal years beginning after
December  15, 2001.  The adoption of SOP 01-6 did not have a material  effect on
the Company's consolidated financial statements.

In December  2001,  the Auditing  Standards  Board issued SAS No. 95,  Generally
Accepted  Auditing  Standards.  This  statement  supersedes  Generally  Accepted
Auditing  Standards of SAS No. 1 and generally provides  additional  guidance to
the  independent  auditor in the conduct of an audit  engagement,  primarily  by
addressing   authoritative   and   nonauthoritative   publications   for   audit
consideration  and  guidance.  This SAS is  effective  for  audits of  financial
statements  for periods  beginning on or after  December 15, 2001. The impact on
the audit of the Company's  consolidated financial statements resulting from the
issuance of this auditing standard was not material.

In  January  2002,  the  Auditing  Standards  Board  issued  SAS No.  96,  Audit
Documentation.  This statement  supersedes SAS No. 41, Working Papers and amends
SAS No. 47,  Audit Risk and  Materiality  in  Conducting  an Audit,  SAS No. 56,
Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's
Ability to Continue as a Going Concern. This statement provides revised guidance
to the  independent  auditor as to the type,  purpose and  requirements of audit
documentation.  This SAS is  effective  for audits of financial  statements  for
periods  beginning  on or after  May 15,  2002.  The  impact on the audit of the
Company's  consolidated financial statements resulting from the issuance of this
auditing standard was not material.

In April 2002,  the Financial  Accounting  Standards  Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical  Corrections.  SFAS No. 145 addresses accounting and financial
reporting for  extinguishments of debt,  intangible assets of motor carriers and
leases.  SFAS  No.  145 is  effective  for  fiscal  years  beginning  after  and
transactions occurring after May 15, 2002. The adoption of this statement is not
expected  to have a  material  effect on the  Company's  consolidated  financial
statements.

In June 2002,  the  Financial  Accounting  Standards  Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.  The statement
addresses  financial  reporting and accounting for costs associated with exit or
disposal  activities  and nullifies  Emerging  Issues Task Force Issue No. 94-3,
Liability  Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity  (including Certain Costs Incurred in a Restructuring).  The
primary  difference  between  SFAS  No.  146  and  Issue  94-3  relates  to  the
requirement  for  recognition  of a liability  related to the cost of an exit or
disposal  activity when the liability is incurred.  Under 94-3,  such  liability
would be recognized at the date of an entity's  commitment to an exit plan. SFAS
No. 146 is effective for exit or disposal  activities  initiated  after December
31, 2002, with early application  encouraged.  The adoption of this statement is
not expected to have a material impact on the Company's  consolidated  financial
statements.

In June 2002,  the  Auditing  Standards  Board  issued SAS No. 97,  Amendment to
Statement on Auditing Standards No. 50, Reports on the Application of Accounting
Principles.  This  statement  prohibits an accountant  from  providing a written
report on the  application  of accounting  principles  not  involving  facts and
circumstances  of a specific  entity.  This SAS is effective for written reports
issued or oral  advice  provided  on or after June 30,  2002.  The impact on the
audit of the Company's  consolidated  financial  statements  resulting  from the
issuance of this auditing standard is not expected to be material.

                                       43
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

In September  2002,  the  Auditing  Standards  Board issued SAS No. 98,  Omnibus
Statement  on  Auditing  Standards  - 2002.  This  statement  revises and amends
several previously issued Statements on Auditing Standards. The changes required
impose  enhanced  quality  controls  and  audit  considerations  on  a  firm  of
independent  auditors in the  conduct of their  audit of a  company's  financial
statements.  The additional  requirements  primarily  relate to more descriptive
guidance on the  application  of auditing  procedures,  the auditors  report and
related disclosures and supplementary information. This SAS No. 98 was effective
upon  issuance  except for the  amendment to SAS No. 70, which is effective  for
reports  issued on or after  January  1,  2003.  The  impact on the audit of the
Company's  consolidated financial statements resulting from the issuance of this
auditing standard was not material.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, an amendment of SFAS No. 72 and 144 and FASB Interpretation No. 9.
Except for  transactions  between two or more mutual  enterprises,  SFAS No. 147
removes acquisitions of financial institutions from the scope of SFAS No. 72 and
Interpretation 9 and requires those  transactions be accounted for in accordance
with SFAS No. 141 and 142.  SFAS No. 147 also  amends SFAS No. 144 to include in
its  scope  long-term  customer-relationship   intangible  assets  of  financial
institutions such as depositor and borrower  relationship  intangible assets and
credit cardholder intangible assets.  Consequently,  those intangible assets are
subject to the same  undiscounted cash flow  recoverability  test and impairment
loss recognition and measurement provisions that SFAS No. 144 requires for other
long-lived  assets  that  are held  and  used.  The  provisions  of SFAS No.  72
requiring the intangible  recognition and subsequent  amortization of any excess
fair value of net  liabilities  assumed in an acquisition  will no longer apply.
SFAS No. 147 is  essentially  effective as of October 1, 2002. As a result,  the
Company  adopted SFAS No. 147 on October 1, 2002, with no material impact on the
Company's consolidated financial statements.

In October 2002, the Auditing  Standards Board issued SAS No. 99,  Consideration
of Fraud in a Financial  Statement Audit.  This statement  supersedes SAS No. 82
and  amends  SAS No.  1 and SAS No.  85.  SAS No.  99  describes  fraud  and its
characteristics;  discusses  the  need for  auditors  to  exercise  professional
skepticism;  requires (as part of planning the audit) that there be a discussion
among the audit team members regarding the risks of material misstatement due to
fraud; and requires auditors to gather  information  necessary to identify risks
of  material  misstatement  due to fraud.  This SAS is  effective  for audits of
financial  statements  for periods  beginning on or after December 15, 2002. The
impact on the audit of the Company's consolidated financial statements resulting
from the issuance of this auditing standard is not expected to be material.

In November  2002,  the Auditing  Standards  Board  issued SAS No. 100,  Interim
Financial  Information.  This statement  supersedes  SAS No. 71 and  establishes
standards on the nature,  timing and extent of the procedures to be performed by
an  independent  accountant  when  conducting  a  review  of  interim  financial
information.  This SAS is  effective  for interim  periods  within  fiscal years
beginning  after  December  15. 2002.  The impact on the audit of the  Company's
consolidated  financial  statements resulting from the issuance of this auditing
standard is not expected to be material.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's  Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of Others.  This  interpretation  changes the current  practice of
accounting for, and the disclosures related to guarantees. Interpretation No. 45
requires certain guarantees to be recorded at fair value, which is a change from
the current  practice of  generally  only  recording a liability  when a loss is
probable and reasonably estimable.  The interpretation also requires a guarantor
to make new  disclosures,  even when the likelihood of making any payments under
the  guarantee is remote,  which is another  change from current  practice.  The
disclosure  requirements  of this  interpretation  are  effective  for financial
statements  of interim or annual  periods  ending after  December 15, 2002.  The
interpretation's  initial  recognition  and initial  measurement  provisions are
applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December 31, 2002. The guarantor's previous accounting for

                                       44
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 1 - Summary of Significant Accounting Policies - Continued

guarantees  issued  prior to the  date of  Interpretation  No.  45 are not to be
revised or restated to reflect the interpretation's  provisions. The adoption of
the disclosure  requirements  of  Interpretation  No. 45 did not have a material
impact on the Company's consolidated  financial statements.  The adoption of the
initial recognition and initial measurement  provisions of Interpretation No. 45
is not  expected  to  have a  material  impact  on  the  Company's  consolidated
financial statements.

In December  2002,  the FASB issued SFAS No.  148,  Accounting  for  Stock-Based
Compensation - Transition and Disclosure.  This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to  the  fair  value  based  method  of  accounting  for  stock-based   employee
compensation.  It amends the disclosure  provisions of that Statement to require
prominent  disclosure  about the effects on  reported  net income of an entity's
accounting policy decisions with respect to stock-based  employee  compensation.
This Statement also amends APB Opinion No. 28 to require  disclosure about those
effects in interim  financial  information.  This  Statement  is  effective  for
financial  statements  for fiscal years  ending after  December 15, 2002 and for
financial reports containing  condensed financial statements for interim periods
beginning  after  December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on the Company's consolidated financial statements.

In January 2003, the Auditing  Standards Board Issued 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 impact on the audit of the  Company's
consolidated  financial  statements resulting from the issuance of this auditing
standard is not expected to be material.

In January  2003,  the FASB issued FIN 46, 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 disclosure
requirements of this  Interpretation are effective for all financial  statements
issued  after  January 31, 2003.  The  consolidation  requirements  apply to all
variable interest  entities created after January 31, 2003. In addition,  public
companies  must  apply  the  consolidation  requirements  to  variable  interest
entities  that  existed  prior to February 1, 2003 and remain in existence as of
the  beginning  of annual or interim  periods  beginning  after  June 15,  2003.
Management is currently assessing the impact of FIN 46, and does not expect this
Interpretation  to  have  a  material  impact  to  the  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.  All per share  amounts
included  in these  financial  statements  have been  retroactively  adjusted to
reflect the effects of the 2-for-1 stock split which  occurred  during 2000. The
following reconciles the weighted average number of shares outstanding:

<TABLE>
<CAPTION>
                                                                                2002           2001           2000
                                                                           -------------  --------------  ------------

<S>                                                                            <C>             <C>           <C>
Weighted average of common shares outstanding............................      2,979,806       2,859,683     2,755,255
Effect of dilutive options...............................................        209,302         221,593       213,671
                                                                           -------------  --------------  ------------
Weighted average of common shares outstanding effected for dilution......      3,189,108       3,081,276     2,968,926
                                                                           =============  ==============  ============
</TABLE>

                                       45
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 1 - Summary of Significant Accounting Policies - Continued

In April 2000, the Company  issued a 2-for-1 stock split.  All per share amounts
included in these  consolidated  financial  statements  have been  retroactively
adjusted to give effect to this split.

Comprehensive Income

The Company adopted Statement of Financial  Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, on December 31, 1998. This statement establishes
standards  for  the  reporting  and  display  of  comprehensive  income  and its
components in a full set of general-purpose financial statements.  The statement
requires  that an enterprise  classify  items of other  comprehensive  income by
their nature in the financial  statement and display the accumulated  balance of
other comprehensive income separately from retained earnings and additional paid
in  capital  in the  equity  section  of a  statement  of  financial  condition.
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,
                                                                           -------------------------------------------
                                                                                2002           2001           2000
                                                                           -------------  --------------  ------------

Unrealized gains (losses) on securities

<S>                                                                        <C>            <C>             <C>
   Unrealized holding gains arising during period........................  $     873,750  $      242,271  $  1,199,018
   Reclassification adjustments for (gains) losses
     included in net income..............................................       (285,525)       (146,976)       10,774
                                                                           -------------  --------------  ------------
   Net unrealized gains..................................................        588,225          95,295     1,209,792
   Income tax related to items of other comprehensive income.............       (199,997)        (31,379)     (425,490)
                                                                           -------------  --------------  ------------

Other comprehensive income ..............................................  $     388,228  $       63,916  $    784,302
                                                                           =============  ==============  ============
</TABLE>

              [The remainder of this page intentionally left blank]

                                       46
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000

Note 1 - Summary of Significant Accounting Policies - Continued

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, 2002.

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                           -------------------------------------------
                                                                                2002           2001           2000
                                                                           -------------  --------------  ------------

<S>                                                                        <C>            <C>             <C>
   Cash paid during the year for interest................................  $  11,716,178  $   13,769,777  $ 12,779,345
   Cash paid during the year for income taxes............................      1,050,345       1,061,461       603,000

   Non-cash Disclosures:
   --------------------

   Loans transferred to foreclose real estate............................      1,477,804         732,882       147,423
   Net increase in unrealized gains and
     losses on securities available-for-sale.............................        588,225          95,295     1,209,792
   Proceeds from sales of foreclosed real estate
     financed through loans..............................................        294,290         619,445            --
   Securities transferred from held-to-maturity
     portfolio to available-for-sale portfolio...........................             --              --     5,799,682
   Change in par value from $5.00 per share to $0.01 per share...........             --              --     6,917,828
   Transfer of stock to 401(k)...........................................             --              --         4,165

</TABLE>

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 as related to the Company on November 12, 2002. AIM
continues to provide services to another bank on a subcontract basis.

Disposition  of the assets of the  discontinued  operations  began in  September
2002. At December 31, 2002,  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.

                                       47
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 3 - Discontinued Operations - Continued

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.


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, 2002 and 2001,
the average  amount of the required  reserves  was  $5,742,000  and  $2,161,000,
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, 2002 and 2001 are presented below.

<TABLE>
<CAPTION>

                                                                              Gross          Gross         Estimated
                                                            Amortized      Unrealized     Unrealized         Fair
                                                              Cost            Gains         Losses           Value
                                                          -------------  -------------  -------------   --------------
Securities Available-for-Sale

December 31, 2002:
<S>                                                       <C>            <C>            <C>             <C>
   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
                                                          =============  =============  =============   ==============

December 31, 2001:
   U.S. Government and agency securities...............   $  14,514,408  $     187,480  $      10,721   $   14,691,167
   State and municipal securities......................      13,994,179         68,297        257,536       13,804,940
   Mortgage-backed securities..........................      19,235,376        131,003         26,369       19,340,010
   Equity securities...................................       1,557,600             --             --        1,557,600
                                                          -------------  -------------  -------------   --------------
                                                          $  49,301,563  $     386,780  $     294,626   $   49,393,717
                                                          =============  =============  =============   ==============
</TABLE>

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.  At December 31, 2001,  the
Company's  available-for-sale  securities  reflected  net  unrealized  gains  of
$92,154,  which resulted in an increase in stockholders equity of $60,822 net of
deferred tax liability.

                                       48
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 5 - Securities - Continued

The  contractual  maturities  of securities  available-for-sale  at December 31,
2002, 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......................................................    $     8,730,357    $     8,797,962
   Due after one year through five years........................................         10,423,091         10,558,162
   Due after five years through ten years.......................................          8,696,899          8,837,354
   Due after ten years..........................................................         10,121,276         10,458,524
   Equity securities............................................................          1,722,900          1,722,900
                                                                                    ---------------    ---------------

                                                                                    $    39,694,523    $    40,374,902
                                                                                    ===============    ===============
</TABLE>

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

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, 2002, were as follows:

<TABLE>
<CAPTION>
                                                                                2002           2001           2000
                                                                           -------------  --------------  ------------

<S>                                                                        <C>            <C>             <C>
Gross realized gains.....................................................  $     290,227  $      174,983  $     10,519
Gross realized losses....................................................          4,702          28,007        21,293
</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  $1,722,900  and  $1,557,600 at
December 31, 2002 and 2001, 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  $9,092,000  and  $9,413,000  at
December 31, 2002 and 2001, 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 were as follows:

<TABLE>
<CAPTION>

                                                                                          2002              2001
                                                                                    ---------------    ---------------

<S>                                                                                 <C>                <C>
Commercial, financial and agricultural..........................................    $    33,448,866    $    29,091,838
Real estate - construction......................................................         73,242,467         54,255,536
Real estate - mortgage..........................................................        165,525,831        147,851,890
Consumer........................................................................         20,295,311         19,370,032
Other loans.....................................................................          5,550,580                 --
                                                                                    ---------------    ---------------
                                                                                        298,063,055        250,569,296
Allowance for loan losses.......................................................         (3,237,898)        (2,995,362)
                                                                                    ---------------    ---------------

Net loans.......................................................................    $   294,825,157    $   247,573,934
                                                                                    ===============    ===============
</TABLE>

                                       49
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 6 - Loans - Continued

Total loans,  which the Company  considered  to be impaired at December 31, 2002
and 2001, were $4,823,000 and $1,642,000,  respectively. All of these loans were
on  nonaccrual  status and had  related  allowances  of $723,450  and  $246,300,
respectively.  Impaired  loans  consisted  primarily of  commercial  loans as of
December 31, 2002 and 2001.  The average  recorded  investment in impaired loans
for the years ended December 31, 2002 and 2001 was approximately  $3,232,500 and
$1,013,500,  respectively.  No material amount of interest income was recognized
on impaired  loans for the years ended  December 31, 2002 and 2001. For the year
ended December 31, 2002, 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  $425,000.
In the year ended December 31, 2001, the amount was negligible.

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


Note 7 - Allowance for Loan Losses

Changes  in the  allowance  for loan  losses for each of the three  years  ended
December 31 are as follows:

<TABLE>
<CAPTION>

                                                                       2002               2001              2000
                                                                 --------------     ---------------    ---------------
<S>                                                              <C>                <C>                <C>
Balance at beginning of year..................................   $     2,995,362    $     2,210,603    $     1,849,290

Charge-offs...................................................          (816,701)          (543,800)          (591,410)
Recoveries....................................................            31,237             34,059             30,783
                                                                 ---------------    ---------------    ---------------
   Net charge-offs............................................          (785,464)          (509,741)          (560,627)

Provision for loan losses.....................................         1,028,000          1,294,500            921,940
                                                                 ---------------    ---------------    ---------------

Balance at end of year........................................   $     3,237,898    $     2,995,362    $     2,210,603
                                                                 ===============    ===============    ===============
</TABLE>


Note 8 - Premises and Equipment

Premises and equipment were as follows:

<TABLE>
<CAPTION>

                                                                                          2002              2001
                                                                                    ---------------    ---------------
<S>                                                                                 <C>                <C>
Land ...........................................................................    $     2,080,417    $       846,558
Buildings and improvements......................................................          4,757,454          4,050,520
Furniture and equipment.........................................................          3,498,374          2,765,158
Computer equipment and software.................................................          1,188,018          1,371,283
Automobiles.....................................................................            140,982            174,935
Construction in progress........................................................             43,713             40,000
                                                                                    ---------------    ---------------
                                                                                         11,708,958          9,248,454
Allowance for depreciation......................................................         (2,937,606)        (2,403,024)
                                                                                    ---------------    ---------------

                                                                                    $     8,771,352    $     6,845,430
                                                                                    ===============    ===============
</TABLE>

The provision for depreciation  charged to occupancy and furniture and equipment
expense for the years ended  December 31,  2002,  2001 and 2000,  was  $679,960,
$640,220 and $472,609, respectively.

                                       50
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 9 - Intangibles

Acquired  goodwill and other intangible assets as of December 31, 2002 and 2001,
are detailed as follows:

<TABLE>
<CAPTION>
                                                                                       2002
                                                                ---------------------------------------------------
                                                                      Gross                               Net
                                                                    Carrying        Accumulated        Carrying
                                                                     Amount        Amortization         Amount
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Identifiable amortizing assets...............................   $        165,000  $        75,627  $         89,373
Nonamortizing goodwill.......................................          2,335,858          343,967         1,991,891
                                                                ----------------  ---------------  ----------------

Total acquired intangible assets.............................   $      2,500,858  $       419,594  $      2,081,264
                                                                ================  ===============  ================
</TABLE>

<TABLE>
<CAPTION>

                                                                                       2001
                                                                ---------------------------------------------------
                                                                      Gross                               Net
                                                                    Carrying        Accumulated        Carrying
                                                                     Amount        Amortization         Amount
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Nonamortizing goodwill.......................................   $      2,335,858  $       343,967  $      1,991,891
                                                                ----------------  ---------------  ----------------

Total acquired intangible assets.............................   $      2,335,858  $       343,967  $      1,991,891
                                                                ================  ===============  ================
</TABLE>

Aggregate  amortization  expense  for the year  ended  December  31,  2002,  was
$75,627.  Aggregate annual  amortization  expense estimated for the years ending
December 31, 2003 and 2004 is $82,500 and $6,893, respectively.

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>

                                                                              Year Ended December 31
                                                                ---------------------------------------------------
                                                                      2002             2001              2000
                                                                ----------------  ---------------  ----------------

<S>                                                             <C>               <C>              <C>
Reported Net income..........................................   $      2,668,008  $     2,538,098  $      1,629,431
Add back Goodwill amortization, net of tax...................                 --          117,747           117,747
                                                                ----------------  ---------------  ----------------

Adjusted net income..........................................   $      2,668,008  $     2,655,845  $      1,747,178
                                                                ================  ===============  ================

Basic earnings per share:
     Reported net income.....................................   $           0.90  $          0.89  $           0.59
     Goodwill amortization...................................               0.00             0.03              0.04
                                                                ----------------  ---------------  ----------------

     Adjusted net income.....................................   $           0.90  $          0.92  $           0.63
                                                                ================  ===============  ================

Diluted earnings per share:
     Reported net income.....................................   $           0.84  $          0.82  $           0.55
     Goodwill amortization...................................               0.00             0.02              0.04
                                                                ----------------  ---------------  ----------------

     Adjusted net income.....................................   $           0.84  $          0.84  $           0.59
                                                                ================  ===============  ================
</TABLE>

                                       51
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


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, 2002 and 2001 were
$60,533,038 and $48,189,453,  respectively.  Time deposits of less than $100,000
totaled   $110,095,352   and   $115,393,198  at  December  31,  2002  and  2001,
respectively.  Demand deposits  reclassified as loan balances as of December 31,
2002 and 2001 amounted to $60,286 and $71,809, respectively.

The maturities of time certificates of deposit and other time deposits issued by
the Company at December 31, 2002, are as follows:

<TABLE>
<CAPTION>

                                                                                                            Time
                                                                                                        Certificates
                                                                                                         of Deposit
                                                                                                       ---------------
           Years ending December 31,
<S>                   <C>                                                                              <C>
                      2003.........................................................................    $   134,385,461
                      2004.........................................................................         26,316,011
                      2005.........................................................................          6,078,132
                      2006.........................................................................          3,360,923
                      2007.........................................................................            487,863
                                                                                                       ---------------
                                                                                                       $   170,628,390
                                                                                                       ===============
</TABLE>

Note 11 - Short-term Borrowings

Short-term borrowings at December 31, 2002 and 2001 consist of the following:

<TABLE>
<CAPTION>

                                                                                          2002              2001
                                                                                    ---------------    ---------------
<S>                                                                                 <C>                <C>
Federal funds purchased.........................................................    $            --    $     1,932,000
Securities sold under agreements to repurchase..................................          5,928,624          1,732,699
                                                                                    ---------------    ---------------

                                                                                    $     5,928,624    $     3,664,699
                                                                                    ===============    ===============
</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>
                                                                                          2002              2001
                                                                                    ---------------    ---------------

<S>                                                                                 <C>                <C>
Average balance during the year.................................................    $     4,061,294    $     1,930,051
Average interest rate during the year...........................................               1.60%              3.20%
Maximum month-end balance during the year.......................................    $     5,928,624    $     3,144,208


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

Carrying value..................................................................    $     6,106,585    $     2,466,745
Estimated fair value............................................................          6,106,585          2,466,745
</TABLE>

                                       52
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000

Note 12 - Long-term Debt

At  December  31,  2002  and  2001,  the  Company  had  notes  payable  totaling
$34,735,714 and $29,653,571, respectively.

Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>

                                                                                          2002              2001
                                                                                    ---------------    ---------------
<S>   <C>                                                                           <C>                <C>
Notes  payable  on line of credit at FHLB,  with
   varying maturities; from  April 2002  through
   October 2008, interest rate varies from 1.96%
   to 7.32%, secured by residential mortgages...................................    $    30,135,714    $    25,053,571

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          4,600,000
                                                                                    ---------------    ---------------

                                                                                    $    34,735,714    $    29,653,571
                                                                                    ===============    ===============
</TABLE>

Maturities of long-term debt following December 31, 2002, are as follows:

<TABLE>
<CAPTION>
           Years ending December 31,
<S>                   <C>                                                                              <C>
                      2003.........................................................................    $    17,099,857
                      2004.........................................................................          2,899,857
                      2005.........................................................................          4,857,000
                      2006.........................................................................          1,857,000
                      2007.........................................................................          1,357,000
                      Thereafter...................................................................          6,665,000
                                                                                                       ---------------
                                                                                                       $    34,735,714
                                                                                                       ===============
</TABLE>


Note 13 - Shareholders' Equity

At December 31, 2002 and 2001  Shareholders'  Equity of the Company consisted of
the following:

Common Stock:  At December 31, 2002,  20,000,000  shares  authorized,  3,327,160
shares  issued and  3,126,607  outstanding  with a par value of $0.01 per share.
Voting  rights  equal to one vote per share.  At December  31,  2001  20,000,000
shares authorized,  3,134,670 shares issued and 2,881,670 outstanding with a par
value of $0.01 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:  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.

                                       53
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 13 - Shareholders' Equity - Continued

Treasury  Stock:  Represents  200,553  and  253,000  shares of  common  stock at
December 31, 2002 and 2001, at cost.

In 2002,  the  Company  issued  11,690  shares of stock to its  401(k)  Plan for
$163,660.  Of this  amount,  $117 was  allocated to common stock and $163,543 to
paid-in-capital.  The Company also sold 52,447 shares of its treasury  stock for
$786,705  allocated  as  such;  $467,504  to  treasury  stock  and  $319,201  to
paid-in-capital.  In  addition,  180,800  options were  exercised  for an amount
equaling  $1,021,498,  including  tax benefit,  of which $1,808 was allocated to
common stock and $1,019,690 to paid-in capital.

In 2001,  the  Company  sold  20,522  shares  of stock  to its  401(k)  plan for
$287,308.  Of this  amount,  $205 was  allocated to common stock and $287,103 to
paid-in  capital.  In  addition,  3,900  options  were  exercised  for an amount
equaling  $32,381,  including tax benefit,  of which $39 was allocated to common
stock and $32,342 to paid-in capital.

In 2000,  the  Company  issued  24,192  shares of stock to its  401(k)  plan for
$292,838.  Of this amount $242 was  allocated  to common  stock and  $292,596 to
paid-in capital.  The Company also purchased  165,000 shares of common stock for
$1,827,705,  which is reflected as treasury  stock,  at cost,  in  shareholders'
equity.  During  2000,  the  Company  sold  306,612  shares of stock in a public
offering for $4,599,190, net of issuance costs, of which $3,066 was allocated to
common stock and $4,596,124 to paid-in capital. In addition,  1,200 options were
exercised for an amount equaling $7,200, including tax benefit, of which $12 was
allocated to common stock and $7,188 to paid-in capital.

The Company is also  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, 2002 and 2001 are disclosed in Note 19 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, 2002,  the Bank could  declare  dividends  of  approximately
$1,614,000  without  regulatory  consent,  subject to the Bank's compliance with
regulatory capital restrictions.  It is anticipated that any such dividends will
be used for the payment of long-term debt service.


              [The remainder of this page intentionally left blank]

                                       54
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 14 - Other Operating Expenses

Other operating expenses consist of the following:

<TABLE>
<CAPTION>
                                                                       2002               2001              2000
                                                                 ----------------   ---------------    ---------------

<S>                                                              <C>                <C>                <C>
Professional fees.............................................   $        675,728   $       469,267    $       426,710
Advertising...................................................            566,684           440,651            418,125
Director and committee fees...................................            405,305           411,804            379,542
Stationery and supplies.......................................            307,937           264,271            262,175
Postage.......................................................            163,746           126,668            132,150
Taxes and licenses............................................            157,459           132,472             50,080
Insurance.....................................................            118,670           144,286            123,827
Education.....................................................             95,107            37,386             24,760
Data processing...............................................             83,572           395,270            218,669
Correspondent bank charges....................................             77,829            84,294             58,592
Amortization..................................................             75,624           117,747            117,747
Checking account expense......................................             60,286            56,805             66,769
Dues and subscriptions........................................             45,594            39,546             29,374
Other.........................................................            575,328           397,931            474,031
                                                                 ----------------   ---------------    ---------------

   Total other operating expenses.............................   $      3,408,869   $     3,118,398    $     2,782,551
                                                                 ================   ===============    ===============
</TABLE>


Note 15 - Income Taxes

Federal and state income taxes receivable  (payable) as of December 31, 2002 and
2001 included in other assets and other liabilities were as follows:

<TABLE>
<CAPTION>

                                                                                          2002              2001
                                                                                    ---------------    ---------------
Current
<S>                                                                                 <C>                <C>
   Federal......................................................................    $       328,516    $       106,753
   State........................................................................            (34,120)          (103,660)
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                          2002              2001
                                                                                    ---------------    ---------------
Deferred tax asset:
<S>                                                                                 <C>                <C>
   Federal......................................................................    $       895,595    $       770,925
   State........................................................................             79,347             68,317
                                                                                    ---------------    ---------------
     Total deferred income tax asset............................................            974,942            839,242
                                                                                    ---------------    ---------------
Deferred tax liability:
   Federal......................................................................           (476,096)          (213,572)
   State........................................................................            (43,175)           (19,003)
                                                                                    ---------------    ---------------
     Total deferred income tax liability........................................           (519,271)          (232,575)
                                                                                    ---------------    ---------------
Net deferred tax asset..........................................................    $       455,671    $       606,667
                                                                                    ===============    ===============
</TABLE>

                                       55
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 15 - Income Taxes - Continued

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

<TABLE>
<CAPTION>

                                                                                          2002              2001
                                                                                    ---------------    ---------------
<S>                                                                                 <C>                <C>
Net unrealized gains on securities available-for-sale...........................    $      (231,329)   $       (31,333)
Depreciation....................................................................           (287,942)          (201,242)
Allowance for loan losses.......................................................            913,888            782,956
Deferred compensation...........................................................             60,578             55,098
Other...........................................................................                476              1,188
                                                                                    ---------------    ---------------
                                                                                    $       455,671    $       606,667
                                                                                    ===============    ===============
</TABLE>

The components of income tax expense (benefit) for the years 2002, 2001 and 2000
are as follows:

<TABLE>
<CAPTION>

                                                                       2002               2001              2000
                                                                 ----------------   ---------------    ---------------
Current
<S>                                                              <C>                <C>                <C>
   Federal....................................................   $        960,471   $     1,038,142    $       741,910
   State......................................................             94,469           106,171             19,525
Deferred
   Federal....................................................            (45,000)         (179,725)            97,137
   State......................................................             (4,000)           (2,000)            13,206
                                                                 ----------------   ---------------    ---------------

                                                                 $      1,005,940   $       962,588    $       871,778
                                                                 ================   ===============    ===============
</TABLE>

Tax effects of  securities  transactions  resulted in an increase  (decrease) in
income  taxes for 2002,  2001 and 2000 of  approximately  $97,079,  $49,972  and
$(3,663), 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, 2002,
2001 and 2000.

<TABLE>
<CAPTION>
                                                                       2002               2001              2000
                                                                 ----------------   ---------------    ---------------
<S>                                                                          <C>               <C>                <C>
Statutory federal income tax rate.............................               34.0%             34.0%              34.0%

Effect on rate of:
   Tax-exempt securities......................................               (7.3)             (5.2)              (5.8)
   Tax-exempt loans...........................................               (1.0)             (1.1)              (0.8)
   Interest expense disallowance..............................                0.9               0.6                1.1
   State income tax, net of federal tax.......................                1.6               1.9                1.0
   Other......................................................               (0.8)             (2.7)               5.4
                                                                 ----------------   ---------------    ---------------
Effective income tax rate.....................................               27.4%             27.5%              34.9%
                                                                 ================   ===============    ===============
</TABLE>

                                       56
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 16 - 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, 2002 and 2001, the
Company has issued  standby  letters of credit of  approximately  $1,320,000 and
$1,311,000.

Loan Commitments:  As of December 31, 2002 and 2001, the Company had commitments
outstanding to extend credit totaling approximately $35,890,000 and $34,084,000,
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 17 - 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 $11,490,407 at December 31,
2002. There were no uninsured balances at 2001.


Note 18 - 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.

                                       57
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 18 - Stock Option Plans - Continued

The following  sets forth certain  information  regarding  stock options for the
years ended December 31, 2002,  2001,  and 2000.  Stock option shares and prices
have been adjusted to reflect the effects of the 2-for-1 stock split in 2000.

Fixed Options

<TABLE>
<CAPTION>

                                                    2002                       2001                      2000
                                           ----------------------    ------------------------  -----------------------
                                                         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........      638,900  $     5.18       599,400   $      4.52     587,600   $     4.29
Granted.................................           --          --        50,000         14.00      13,000        15.00
Exercised...............................     (180,800)       4.01        (3,900)         4.21      (1,200)        6.00
Forfeited...............................           --          --        (6,600)        12.82          --           --
                                           ----------                -----------               ----------

Outstanding at end of year..............      458,100        5.64       638,900          5.18     599,400         4.52
                                           ==========                ===========               ==========

Exercisable at end of year..............      379,700        4.61       417,700          4.20     306,000         4.22
                                           ==========                ===========               ==========

Weighted average fair value
   of options granted...................   $       --                $     4.18                $     5.02
                                           ==========                ===========               ==========
</TABLE>

Information  pertaining  to options  outstanding  at December  31,  2002,  is as
follows:

<TABLE>
<CAPTION>

                                                                   Outstanding        Expiration          Options
                                                                      Number              Date           Exercisable
                                                                 ----------------   ---------------    ---------------
<S>                               <C>                                     <C>               <C>  <C>           <C>
Options with an Exercise Price of $4.00.......................            318,500           6/01/07            318,500
Options with an Exercise Price of $6.00.......................             81,600           6/22/09             48,000
Options with an Exercise Price of $15.00......................              8,000           6/30/10              3,200
Options with an Exercise Price of $14.00......................             50,000           7/10/11             10,000
</TABLE>

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

If the Company had elected to recognize compensation cost for options granted in
2002, 2001 and 2000, based on the fair value of the options as permitted by SFAS
No. 123,  net income and  earnings per share would have reduced to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>

                                                                                Years Ended December 31,
                                                                 -----------------------------------------------------
                                                                       2002               2001              2000
                                                                 ----------------   ---------------    ---------------
Net Income
<S>                                                              <C>                <C>                <C>
   As reported................................................   $      2,668,008   $     2,538,098    $     1,629,431
   Pro forma..................................................          2,561,641         2,415,583          1,483,296

Basic Earnings Per Share
   As reported................................................   $           0.90   $          0.89    $          0.59
   Pro forma..................................................               0.86              0.84               0.54

Diluted Earnings Per Share
   As reported................................................   $           0.84   $          0.82    $          0.55
   Pro forma..................................................               0.80              0.78               0.50
</TABLE>

                                       58
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 18 - Stock Option Plans - Continued

All options are assumed to be exercised in the  calculation  of diluted  average
common shares  outstanding,  causing the equivalent number of shares outstanding
on a diluted basis to be greater than that used to calculate  basic earnings per
share for 2002 by 209,302,  221,593  greater than that used to  calculate  basic
earnings  per share for 2001 and  213,671  greater  than that used to  calculate
basic  earnings per share for 2000.  The dilutive  effects on earnings per share
for the years ended  December 31,  2002,  2001 and 2000 were $0.06,  $0.07,  and
$0.04, respectively.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>

                                                                       2002               2001              2000
                                                                 ----------------   ---------------    ---------------
<S>                                                                           <C>             <C>                <C>
Expected dividend yield.......................................                --              1.90%              1.90%
Expected stock price volatility...............................                --              24.20              25.70
Risk-free interest rate.......................................                --               4.95               6.00
Expected life of options......................................                --         7.50 years         7.50 years
</TABLE>

The effects of applying  SFAS 123 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.


Note 19 - 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 I Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002,  that the Company and the Bank meet all capital  adequacy  requirements to
which they are subject.

As of December  31,  2002,  the most  recent  notification  from the  applicable
regulatory agencies categorized Appalachian Community Bank, the subsidiary bank,
as adequately  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 I Capital and Tier I Leverage ratios as set
forth in the table below.  There have been  conditions  and/or  events since the
most recent  notification that management believes has changed the Bank's prompt
corrective action categories.

                                       59
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 19 - Regulatory Matters - Continued

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, 2002:

Total Capital
<S>                                    <C>             <C>      <C>                <C>    <C>               <C>
   Consolidated                        $     26,327      8.59%   $     24,512      8.00%  $       30,641     10.00%
   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           18,384      6.00
   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           19,032      5.00
   Appalachian Community Bank                27,299      7.17          15,225      4.00           19,032      5.00

As of December 31, 2001:

Total Capital
   Consolidated                        $     21,533     8.32%    $     20,700      8.00%  $       25,875     10.00%
   Appalachian Community Bank                26,120    10.09           20,718      8.00           25,897     10.00
Tier 1 Capital
   Consolidated                              18,538    7.16            10,350      4.00           15,525      6.00
   Appalachian Community Bank                23,125    8.93            10,359      4.00           15,538      6.00
Tier 1 Leverage
   Consolidated                              18,538    5.87            12,642      4.00           15,802      5.00
   Appalachian Community Bank                23,125    7.32            12,642      4.00           15,802      5.00
</TABLE>


Note 20 - 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  $215,353 in 2002,  $223,678 in
2001 and $219,940 in 2000.

                                       60
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 21 - 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,  2002,  2001 and 2000,  rental  expense  for
operating leases was approximately $68,412, $50,600 and $29,000, respectively.

Future minimum lease payments under noncancellable  operating leases at December
31, 2002, are as follows:

<TABLE>
<CAPTION>

         Years Ending December 31,
<S>                 <C>                                                                                <C>
                    2003...........................................................................    $        43,754
                    2004...........................................................................             34,381
                    2005...........................................................................             35,020
                    2006...........................................................................             33,373
                    2007...........................................................................             33,938
                    Thereafter.....................................................................            837,869
                                                                                                       ---------------

                    Total minimum lease payments...................................................    $     1,018,335
                                                                                                       ===============
</TABLE>


Note 22 - Related Party Transactions

Loans:  Certain  directors,   executive  officers  and  principal  shareholders,
including  their  immediate  families and associates  were loan customers of the
Company  during  2002 and 2001.  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>

                                                                                          2002              2001
                                                                                    ---------------    ---------------
<S>                                                                                 <C>                <C>
Balance at Beginning of Year....................................................    $     8,431,432    $     6,646,716
New loans.......................................................................          2,373,027          2,037,909
Repayments......................................................................         (2,330,592)          (253,193)
Participated sold...............................................................           (572,269)                --
Change in related parties.......................................................           (111,546)                --
                                                                                    ---------------    ---------------

Balance at End of Year..........................................................    $     7,790,052    $     8,431,432
                                                                                    ===============    ===============
</TABLE>

Deposits:  Deposits held from related  parties were $1,344,094 and $1,589,713 at
December 31, 2002 and 2001, respectively.

Lease: The Bank leases a facility from a partnership which includes directors of
the  Company.  The lease  commenced  in May 2001 and has an  initial  term of 24
months.  Annual lease expense is set at $30,000. The Bank has an option to renew
at the end of the term for an  additional  24 months at annual lease  expense of
$33,000.


Note 23 - 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.

                                       61
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 24 - 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 same as the notional amount of the related commitment.

              [The remainder of this page intentionally left blank]


                                       62
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 24 - Fair Value of Financial Instruments - Continued

The estimated fair values of the Company's financial  instruments as of December
31 are as follows:

<TABLE>
<CAPTION>

                                                                   2002                              2001
                                                     ------------------------------     ------------------------------
                                                        Carrying           Fair            Carrying           Fair
                                                         Amount            Value            Amount            Value
                                                     ------------      ------------     ------------      ------------
                                                               (in thousands)                   (in thousands)

Financial assets
<S>                                                  <C>               <C>              <C>               <C>
Cash and short-term investments..................    $     30,857      $     30,857     $      7,558      $      7,558
Securities.......................................          40,375            40,375           49,394            49,394
Loans............................................         298,063           299,334          250,569           250,556
Accrued interest receivable......................           2,241             2,241            2,499             2,499
                                                     ------------      ------------     ------------      ------------
   Total Financial Assets........................    $    371,536      $    372,807     $    310,020      $    310,007
                                                     ============      ============     ============      ============

Financial Liabilities
Deposits.........................................    $    316,283      $    319,075     $    264,028      $    267,934
Short-term borrowings............................           5,929             5,929            3,665             3,665
Accrued interest payable.........................             976               976            1,267             1,267
Long-term debt...................................          34,736            36,782           29,654            29,985
                                                     ------------      ------------     ------------      ------------
   Total Financial Liabilities...................    $    357,924      $    362,762     $    298,614      $    302,851
                                                     ============      ============     ============      ============

Unrecognized financial instruments
Commitments to extend credit.....................    $     35,890      $     35,890     $     34,084      $     34,084
Standby letters of credit........................           1,320             1,320            1,311             1,311
                                                     ------------      ------------     ------------      ------------
   Total Unrecognized Financial
     Instruments.................................    $     37,210      $     37,210     $     35,395      $     35,395
                                                     ============      ============     ============      ============
</TABLE>

              [The remainder of this page intentionally left blank]

                                       63
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 25 - Condensed Parent Information

Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                    ----------------------------------
                                                                                          2002              2001
                                                                                    ---------------    ---------------
Assets
<S>                                                                                 <C>                <C>
   Cash and due from banks......................................................    $         5,343    $       196,123
   Investment in Subsidiaries (equity method) eliminated upon consolidation.....         29,828,837         25,177,931
   Other assets.................................................................            385,109             65,677
                                                                                    ---------------    ---------------

     Total Assets...............................................................    $    30,219,289    $    25,439,731
                                                                                    ===============    ===============

Liabilities and Shareholders' Equity
   Note payable.................................................................    $     4,600,000    $     4,600,000
   Other liabilities............................................................                 --            248,541
                                                                                    ---------------    ---------------
     Total Liabilities..........................................................          4,600,000          4,848,541

     Total Shareholders' Equity.................................................         25,619,289         20,591,190
                                                                                    ---------------    ---------------

     Total Liabilities and Shareholders' Equity.................................    $    30,219,289    $    25,439,731
                                                                                    ===============    ===============
</TABLE>

Statements of Income

<TABLE>
<CAPTION>
                                                                                Years ended December 31,
                                                                 ----------------------------------------------------
                                                                       2002               2001              2000
                                                                 ----------------   --------------     --------------
Income
<S>                                                              <C>                <C>                <C>
   Interest...................................................   $             --   $           --     $        4,496
   Dividends from subsidiaries - eliminated upon consolidation                 --          250,000            700,000
                                                                 ----------------   --------------     --------------
                                                                               --          250,000            704,496

Expenses
   Interest...................................................            205,218          319,067            397,866
   Other expenses.............................................            496,725          490,156            417,772
                                                                 ----------------   --------------     --------------
                                                                          701,943          809,223            815,638
                                                                 ----------------   --------------     --------------

Loss before income taxes and equity in undistributed
   earnings of subsidiaries...................................           (701,943)        (559,223)          (111,142)
Income tax benefits...........................................            257,277          307,196            244,364
                                                                 ----------------   --------------     --------------

Earnings (loss) before equity in undistributed earnings
   of subsidiaries............................................           (444,666)        (252,027)           133,222

Equity in undistributed earnings of subsidiaries..............          3,112,674        2,790,125          1,496,209
                                                                 ----------------   --------------     --------------

     Net Income...............................................   $      2,668,008   $    2,538,098     $    1,629,431
                                                                 ================   ==============     ==============
</TABLE>

                                       64
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 25 - Condensed Parent Information - Continued

Statements of Cash Flow

<TABLE>
<CAPTION>

                                                                                Years ended December 31,
                                                                 ----------------------------------------------------
                                                                       2002               2001              2000
                                                                 ----------------   --------------     --------------
Operating Activities
<S>                                                              <C>                <C>                <C>
   Net Income.................................................   $      2,668,008   $    2,538,098     $    1,629,431
   Adjustments to reconcile net income to net cash
     provided by operating activities
     Equity in undistributed income of subsidiaries...........         (3,112,674)      (2,790,125)        (1,496,209)
     Deferred tax expense (benefit)...........................                 --               --             76,618
     Increase (decrease) in accrued interest payable..........                 --         (108,739)           108,739
     Other....................................................           (272,079)         224,262            179,993
                                                                 ----------------   --------------     --------------
       Net Cash Provided By (Used In) Operating Activities....           (716,745)        (136,504)           498,572
                                                                 ----------------   --------------     --------------

Investing Activities
   Capital injection in subsidiaries..........................         (1,150,000)              --         (4,400,000)
                                                                 ----------------   --------------     --------------
       Net Cash Used In Investing Activities..................         (1,150,000)              --         (4,400,000)
                                                                 ----------------   --------------     --------------

Financing Activities
   Proceeds from issuance of long-term debt...................                 --               --          4,600,000
   Repayment of long-term debt................................                 --               --         (3,600,000)
   Proceeds from issuance of common stock.....................            889,260          319,689          4,662,185
   Purchases of treasury stock................................                 --               --         (1,827,205)
   Proceeds from issuance of treasury stock...................            786,705               --                 --
                                                                 ----------------   --------------     --------------
       Net Cash Provided By Financing Activities..............          1,675,965          319,689          3,834,980
                                                                 ----------------   --------------     --------------

Net Increase (Decrease) in Cash and Cash Equivalents..........           (190,780)         183,185            (66,448)

Cash and Cash Equivalents at Beginning of Year................            196,123           12,938             79,386
                                                                 ----------------   --------------     --------------

Cash and Cash Equivalents at End of Year......................   $          5,343   $      196,123     $       12,938
                                                                 ================   ==============     ==============



Cash paid during the year for:
   Interest...................................................   $        205,218   $      427,806     $      289,127
</TABLE>

                                       65
<PAGE>
                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001 and 2000


Note 26 - Quarterly Results of Operations (Unaudited)

Selected quarterly results of operations for the four quarters ended December 31
are as follows:

<TABLE>
<CAPTION>

                                          First          Second          Third         Fourth
                                         Quarter         Quarter        Quarter        Quarter           Total
                                      -------------  -------------   -------------  -------------  ----------------
                                                         (In Thousands Except Per Share Data)
2002:
<S>                                   <C>            <C>             <C>            <C>            <C>
Total interest income..............   $       5,455  $       5,614   $       5,883  $       5,962  $         22,914
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          2,719            10,461
Securities gains (losses)..........              20              7               1            258               286
Total noninterest income...........             602            721             881            425             2,629
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..................            0.22           0.16            0.23           0.29             0.90
   Diluted earnings................            0.20           0.14            0.21           0.29             0.84

2001:
Total interest income..............   $       6,178  $       6,128   $       6,258  $       6,199  $         24,763
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.......           2,164          2,616           2,543          2,471             9,794
Securities gains (losses)..........              94             24             (19)            48               147
Total noninterest income...........             440            270             231            450             1,391
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..................            0.21           0.27            0.19           0.22             0.89
   Diluted earnings................            0.19           0.24            0.18           0.21             0.82

2000:
Total interest income..............   $       4,742  $       5,266   $       6,087  $       5,875            21,970
Total interest expense.............           2,835          3,214           3,689          3,587            13,325
Provision for loan losses..........             300            350             160            112               922
Net interest income after
   provision for loan losses.......           1,607          1,702           2,238          2,176             7,723
Securities gains (losses)..........              (7)            --               1             (5)              (11)
Total noninterest income...........             245            245             368            312             1,170
Total noninterest expense..........           1,386          1,519           1,805          1,671             6,381
Income tax expense.................             148             45             218            461               872
Net income.........................             311            383             584            351             1,629

Per Common Share:
   Basic earnings..................            0.12           0.14            0.21           0.12             0.59
   Diluted earnings................            0.11           0.13            0.19           0.12             0.55
</TABLE>

                                       66
<PAGE>

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

     None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information appearing under the heading "Election of Directors" and the
subheadings   "Executive  Officers"  and  "Section  16(a)  Beneficial  Ownership
Reporting  Compliance"  in the Proxy  Statement  (the "2003  Proxy  Statement"),
relating to the annual meeting of shareholders  of the Company,  scheduled to be
held on May 20, 2003, is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The  information  appearing  under the heading  "Compensation  of Executive
Officers and Directors" in the 2003 Proxy  Statement is  incorporated  herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information  appearing under the heading "Outstanding Voting Securities
of the Company and  Principal  Holders  Thereof" in the 2003 Proxy  Statement is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information  appearing  under the caption  "Certain  Relationships  and
Transactions" in the 2003 Proxy Statement is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

     (a)  Evaluation of disclosure controls and procedures.

          The Company has evaluated the effectiveness of its disclosure controls
          and  procedures  pursuant to Exchange Act Rule 13a-14.  The evaluation
          was performed  under the  supervision  and with the  participation  of
          management,  including  the  chief  executive  officer  and the  chief
          financial  officer,  within 90 days prior to the date of the filing of
          this annual  report.  Based on this  evaluation,  the chief  executive
          officer and chief financial officer have concluded that the disclosure
          controls and  procedures  are  effective in ensuring that all material
          information  required to be disclosed  in this annual  report has been
          communicated to them in a manner appropriate to allow timely decisions
          regarding required disclosure.

     (b)  Changes in internal controls.

          Subsequent to the date of the chief executive  officer's and the chief
          financial officer's  evaluation,  there were no significant changes in
          internal  controls or other  factors that could  significantly  affect
          internal  controls,  including any  corrective  actions with regard to
          significant deficiencies and material weaknesses.

                                       67
<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  Conditionas of December 31, 2002 and
     2001

     Consolidated  Statements  of Income for the Years Ended  December 31, 2002,
     2001 and 2000

     Consolidated  Statements  of  Shareholders'  Equity  for  the  Years  Ended
     December 31, 2002, 2001 and 2000

     Consolidated  Statements  of Cash Flows for the Years  Ended  December  31,
     2002, 2001 and 2000

     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 with this Report:

<TABLE>
<CAPTION>

Exhibit Number                                Description of Exhibit                             Page

<C>                                                                   <C>                         <C>
3.1  Articles of  Incorporation  of the Company  (included as Exhibit 3.1 to the
     Company's  Registration  Statement on Form 8-A,  dated  September  16, 1996
     (File No. 000-21383), previously filed with the Commission and incorporated
     herein by reference).

3.2  Bylaws  of  the  Company   (included  as  Exhibit  3.2  to  the   Company's
     Registration  Statement  on Form 8-A,  dated  September  16, 1996 (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).

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 herin by reference).

                                       68
<PAGE>

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).

11   Statement re: Computation of Per Share Earnings                                              73

12   Statement re: Computation of Ratios                                                          73

21   Subsidiaries of the Registrant                                                               74

23   Consent of Schauer, Taylor, Cox, Vise, Morgan & Fowler, P.C.                                 75

24   Power of Attorney                                                                            76

99.1 Chief  Executive  Officer  and  Chief  Financial  Officer  -  Certification
     pursuant to 18 U.S.C.  Section 1350, as adopted  pursuant to Section 906 of
     the Sarbanes-Oxley Act of 2002                                                               77

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

(b)  There were no reports  on Form 8-K filed by the  Company  during the fourth
     quarter of 2002.
</TABLE>

                                       69
<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 28th day of
March, 2003.


                                                    APPALACHIAN BANCSHARES, INC.


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

                                       By:      /s/ Alan R. May
                                          --------------------------------------
                                          Alan R. May
                                          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.

<TABLE>
<CAPTION>

<S>                                                                                         <C> <C>
   /s/ Tracy R. Newton                                                          Date: March 28, 2003
--------------------------------------------
Tracy R. Newton, President, Chief
Executive Officer and Director

   /s/ Alan S. Dover                                                            Date: March 28, 2003
--------------------------------------------
Alan S. Dover, Director

   /s/ Charles A. Edmondson                                                     Date: March 28, 2003
--------------------------------------------
Charles A. Edmondson, Director

   /s/ Roger E. Futch                                                           Date: March 28, 2003
--------------------------------------------
Roger E. Futch, Director

   /s/ Joseph C. Hensley                                                        Date: March 28, 2003
--------------------------------------------
Joseph C. Hensley, Director

   /s/ Frank E. Jones                                                           Date: March 28, 2003
--------------------------------------------
Frank E. Jones, Director

   /s/ J. Ronald Knight                                                         Date: March 28, 2003
--------------------------------------------
J. Ronald Knight, Director

   /s/ P. Joe Sisson                                                            Date: March 28, 2003
--------------------------------------------
P. Joe Sisson, Director

   /s/ Kenneth D. Warren                                                        Date: March 28, 2003
--------------------------------------------
Kenneth D. Warren, Director
</TABLE>

                                       70
<PAGE>

CERTIFICATIONS

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  annual  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 annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  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 annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date:  March 28, 2003

/s/ Tracy R. Newton
-------------------------------
Tracy R. Newton
Chief Executive Officer

                                       71
<PAGE>

                                 CERTIFICATIONS

I, Alan R. May, certify that:

1.   I have reviewed this annual report on Form 10-K of Appalachian  Bancshares,
     Inc.;

2.   Based on my  knowledge,  this  annual  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 annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  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 annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date:  March 28, 2003

/s/ Alan R. May
-------------------------------
Alan R. May
Chief Financial Officer

                                       72
<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, 2002, 2001 and 2000.

<TABLE>
<CAPTION>

                                                                        2002               2001             2000
                                                                 ----------------   ---------------    ---------------
Basic Earnings Per Share:
<S>                                                              <C>                <C>                <C>
   Net income................................................    $      2,668,008   $     2,538,098    $     1,629,431
                                                                 ================   ===============    ===============

   Earnings on common shares.................................    $      2,668,008   $     2,538,098    $     1,629,431
                                                                 ================   ===============    ===============

   Weighted average common shares outstanding - basic........           2,979,806         2,859,693          2,755,255
                                                                 ================   ===============    ===============

   Basic earnings per common share...........................    $          0.90    $          0.89    $          0.59
                                                                 ===============    ===============    ===============

Diluted Earnings Per Share:
   Net income................................................    $      2,668,008   $     2,538,098    $     1,629,431
                                                                 ================   ===============    ===============

   Weighted average common shares
     outstanding.............................................           2,979,806         2,859,693          2,755,255

   Net effect of the assumed exercise of stock
     options - based on the treasury stock method
     using average market price for the year.................             209,302           221,593            213,671
                                                                 ----------------   ---------------    ---------------

   Weighted average common shares outstanding -
     diluted.................................................           3,189,108         3,081,276          2,968,926
                                                                 ================   ===============    ===============

   Diluted earnings per common share.........................    $          0.84    $          0.82    $          0.55
                                                                 ===============    ===============    ===============
</TABLE>


Exhibit 12 - Statements Re: Computation of Ratios

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

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                  -------------------------------------------------
                                                                       2002             2001              2000
                                                                  --------------    -------------    --------------
                                                                               (Dollars in thousands)

<S>                                                               <C>               <C>              <C>
Pretax income.................................................    $        3,674    $       3,501    $        2,501
Add fixed charges:
   Interest on deposits.......................................             9,353           11,295            10,919
   Interest on borrowings.....................................             2,073            2,380             2,406
   Portion of rental expense representing interest expense....                23               17                10
                                                                  --------------    -------------    --------------
     Total fixed charges......................................            11,449           13,692            13,335
                                                                  --------------    -------------    --------------

Income before fixed charges...................................    $       15,123    $      17,193    $       15,836
                                                                  ==============    =============    ==============

Pretax income.................................................    $        3,674    $       3,501    $        2,501
Add fixed charges (excluding interest on deposits):
   Interest on borrowings.....................................             2,073            2,380             2,406
   Portion of rental expense representing interest expense....                23               17                10
                                                                  --------------    -------------    --------------
     Total fixed charges......................................             2,096            2,397             2,416
                                                                  --------------    -------------    --------------

Income before fixed charges (excluding interest on
   deposits)..................................................    $        5,770    $       5,898    $        4,917
                                                                  ==============    =============    ==============

Ratio of Earnings to Fixed Charges
   Including interest on deposits.............................             1.32              1.26              1.29
   Excluding interest on deposits.............................             2.75              2.46              2.04
</TABLE>

                                       73

EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>

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

<S>                                                                                               <C>
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

</TABLE>

                                       74
<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 Statement on Form S-8.


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

                                   SCHAUER TAYLOR COX VISE MORGAN & FOWLER, P.C.

Birmingham, Alabama
March 28, 2003

                                       75
<PAGE>

Exhibit 24 - POWER OF ATTORNEY


                                POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS,  that each person whose  signature  appears
below   constitutes   and  appoints  Tracy  R.  Newton,   his  true  and  lawful
attorney-in-fact,  as agent with full power of substitution  and  resubstitution
for him and in his name,  place and stead, in any and all capacity,  to sign any
or all  amendments  to this Form 10-K and to file the  same,  with all  exhibits
thereto,  and other documents in connection  therewith,  with the Securities and
Exchange  Commission,  granting  unto said  attorney-in-fact  and agents in full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises,  as fully and to all intents and
purposes as they might or could be in person,  hereby  ratifying and  confirming
all that said attorneys-in-fact and agents, and their substitutes,  may lawfully
do or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>

                Directors                                                                      Date
----------------------------------------                                        -----------------------------------

<S>                                                                                         <C> <C>
   /s/ Tracy R. Newton                                                          Date: March 28, 2003
--------------------------------------------
Tracy R. Newton, President, Chief
Executive Officer and Director
[Principal Executive Officer]

   /s/ Alan S. Dover                                                            Date: March 28, 2003
--------------------------------------------
Alan S. Dover, Director

   /s/ Charles A. Edmondson                                                     Date: March 28, 2003
--------------------------------------------
Charles A. Edmondson, Director

   /s/ Roger E. Futch                                                           Date: March 28, 2003
--------------------------------------------
Roger E. Futch, Director

   /s/ Joseph C. Hensley                                                        Date: March 28, 2003
--------------------------------------------
Joseph C. Hensley, Director

   /s/ Frank E. Jones                                                           Date: March 28, 2003
--------------------------------------------
Frank E. Jones, Director

   /s/ J. Ronald Knight                                                         Date: March 28, 2003
--------------------------------------------
J. Ronald Knight, Director

   /s/ P. Joe Sisson                                                            Date: March 28, 2003
--------------------------------------------
P. Joe Sisson, Director

   /s/ Kenneth D. Warren                                                        Date: March 28, 2003
--------------------------------------------
Kenneth D. Warren, Director

</TABLE>

                                       76
<PAGE>

EXHIBIT 99.1

                CERTIFICATION 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, 2002, as filed with the
Securities  and  Exchange  Commission  on the date  hereof (the  "Report"),  the
undersigned,  Tracy R. Newton,  Chief Executive Officer of the Company, and Alan
R, May, Chief Financial Officer of the Company,  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) or
          15(d) of the Securities Exchange Act of 1934; and

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





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

                                                By: /s/ Alan R. May
                                                   -----------------------------
                                                   Alan R. May
                                                   Chief Financial Officer

                                                   Date: March 28, 2003

                                       77