APPALACHIAN BANCSHARES INC
EXHIBIT 10.3
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>abiexh103102203.txt
<DESCRIPTION>EXHIBIT 10.3
<TEXT>
                                                                    EXHIBIT 10.3
                                                                   -------------

                               GUARANTEE AGREEMENT
                          APPALACHIAN BANCSHARES, INC.

                           Dated as of August 28, 2003


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<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

                                                                                                               Page
                                                                                                              ------

                                    ARTICLE I
                         DEFINITIONS AND INTERPRETATION

<S>     <C>                                                                                                      <C>
Section 1.1. Definitions and Interpretation.................................................................     1

                                   ARTICLE II
               POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

Section 2.1. Powers and Duties of the Guarantee Trustee.....................................................    4
Section 2.2. Certain Rights of the Guarantee Trustee........................................................    5
Section 2.3. Not Responsible for Recitals or Issuance of Guarantee..........................................    7
Section 2.4. Events of Default; Waiver......................................................................    7
Section 2.5. Events of Default; Notice......................................................................    8

                                   ARTICLE III
                              THE GUARANTEE TRUSTEE

Section 3.1. The Guarantee Trustee; Eligibility.............................................................    8
Section 3.2. Appointment, Removal and Resignation of the Guarantee Trustee..................................    9

                                   ARTICLE IV
                                    GUARANTEE

Section 4.1. Guarantee......................................................................................    9
Section 4.2. Waiver of Notice and Demand....................................................................   10
Section 4.3. Obligations Not Affected.......................................................................   10
Section 4.4. Rights of Holders..............................................................................   11
Section 4.5. Guarantee of Payment...........................................................................   11
Section 4.6. Subrogation....................................................................................   11
Section 4.7. Independent Obligations........................................................................   11
Section 4.8. Enforcement....................................................................................   12

                                    ARTICLE V
                    LIMITATION OF TRANSACTIONS; SUBORDINATION

Section 5.1. Limitation of Transactions.....................................................................   12
Section 5.2. Ranking........................................................................................   13

                                   ARTICLE VI
                                   TERMINATION

Section 6.1. Termination....................................................................................   13

                                   ARTICLE VII
                                 INDEMNIFICATION

Section 7.1. Exculpation....................................................................................   13
Section 7.2. Indemnification................................................................................   14
Section 7.3. Compensation; Reimbursement of Expenses........................................................   15

                                                        i
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                                TABLE OF CONTENTS
                                   (continued)

                                                                                                              Page
                                                                                                             ------
                                  ARTICLE VIII
                                  MISCELLANEOUS

Section 8.1. Successors and Assigns.........................................................................   15
Section 8.2. Amendments.....................................................................................   15
Section 8.3. Notices........................................................................................   16
Section 8.4. Benefit........................................................................................   16
Section 8.5. Governing Law..................................................................................   17
Section 8.6. Counterparts...................................................................................   17

                                                        ii

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<PAGE>

                               GUARANTEE AGREEMENT

     This GUARANTEE AGREEMENT (the "Guarantee"), dated as of August 28, 2003, is
executed and delivered by Appalachian  Bancshares,  Inc., a bank holding company
incorporated  in Georgia (the  "Guarantor"),  and Wilmington  Trust  Company,  a
Delaware  banking  corporation,  as trustee (the "Guarantee  Trustee"),  for the
benefit of the  Holders  (as  defined  herein)  from time to time of the Capital
Securities  (as  defined  herein)  of  Appalachian  Capital  Trust I, a Delaware
statutory trust (the "Issuer").

     WHEREAS,  pursuant to an Amended  and  Restated  Declaration  of Trust (the
"Declaration"), dated as of August 28, 2003, among the trustees named therein of
the Issuer, Appalachian Bancshares,  Inc., as sponsor, and the Holders from time
to time of  undivided  beneficial  interests  in the assets of the  Issuer,  the
Issuer is issuing on the date hereof securities, having an aggregate liquidation
amount of up to $6,000,000,  designated the Floating Rate TruPS(R) (the "Capital
Securities"); and

     WHEREAS,  as incentive for the Holders to purchase the Capital  Securities,
the Guarantor desires  irrevocably and  unconditionally  to agree, to the extent
set forth in this  Guarantee,  to pay to the Holders of Capital  Securities  the
Guarantee Payments (as defined herein) and to make certain other payments on the
terms and conditions set forth herein.

     NOW,  THEREFORE,  in  consideration  of the  purchase by each Holder of the
Capital Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of
the Holders.


                                    ARTICLE I
                         DEFINITIONS AND INTERPRETATION

     SECTION 1.1. Definitions and Interpretation.

     In this Guarantee, unless the context otherwise requires:

     (a)  capitalized  terms  used in this  Guarantee  but  not  defined  in the
          preamble above have the respective  meanings  assigned to them in this
          Section 1.1;

     (b)  a term  defined  anywhere  in  this  Guarantee  has the  same  meaning
          throughout;

     (c)  all  references  to "the  Guarantee" or "this  Guarantee"  are to this
          Guarantee as modified, supplemented or amended from time to time;

     (d)  all  references  in this  Guarantee  to Articles  and  Sections are to
          Articles and Sections of this Guarantee, unless otherwise specified;

     (e)  terms defined in the  Declaration  as of the date of execution of this
          Guarantee have the same meanings when used in this  Guarantee,  unless
          otherwise  defined in this  Guarantee or unless the context  otherwise
          requires; and

     (f)  a reference to the singular includes the plural and vice versa.

                                       1
<PAGE>

     "Beneficiaries" means any Person to whom the Issuer is or hereafter becomes
indebted or liable.

     "Corporate Trust Office" means the office of the Guarantee Trustee at which
the corporate  trust business of the Guarantee  Trustee shall, at any particular
time, be principally administered, which office at the date of execution of this
Guarantee  is  located  at  Rodney  Square  North,  1100  North  Market  Street,
Wilmington, DE 19890-0001.

     "Covered Person" means any Holder of Capital Securities.

     "Debentures"  means  the  junior  subordinated  debentures  of  Appalachian
Bancshares,   Inc.,  designated  the  Floating  Rate  Junior  Subordinated  Debt
Securities  due 2033,  held by the  Institutional  Trustee  (as  defined  in the
Declaration) of the Issuer.

     "Event of Default" has the meaning set forth in Section 2.4.

     "Guarantee Payments" means the following payments or distributions, without
duplication,  with respect to the Capital Securities,  to the extent not paid or
made by the Issuer: (i) any accrued and unpaid  Distributions (as defined in the
Declaration)  which are  required to be paid on such Capital  Securities  to the
extent the Issuer has funds available in the Property Account (as defined in the
Declaration) therefor at such time, (ii) the Redemption Price (as defined in the
Indenture) to the extent the Issuer has funds available in the Property  Account
therefor at such time, with respect to the Capital Securities at maturity on any
Capital  Securities  called for  redemption  by the  Issuer,  (iii) the  Special
Redemption  Price (as  defined  in the  Indenture)  to the extent the Issuer has
funds available in the Property  Account  therefor at such time, with respect to
Capital  Securities called for redemption upon the occurrence of a Special Event
(as  defined  in the  Indenture),  and  (iv)  upon a  voluntary  or  involuntary
liquidation, dissolution, winding-up or termination of the Issuer (other than in
connection  with the  distribution  of  Debentures to the Holders of the Capital
Securities in exchange therefor as provided in the  Declaration),  the lesser of
(a)  the  aggregate  of the  liquidation  amount  and  all  accrued  and  unpaid
Distributions  on the Capital  Securities to the date of payment,  to the extent
the Issuer has funds  available in the Property  Account  therefor at such time,
and (b) the amount of assets of the Issuer remaining  available for distribution
to Holders in  liquidation  of the Issuer after  satisfaction  of liabilities to
creditors  of the Issuer as  required by  applicable  law (in either  case,  the
"Liquidation Distribution").

     "Guarantee  Trustee"  means  Wilmington  Trust  Company,  until a Successor
Guarantee Trustee has been appointed and has accepted such appointment  pursuant
to the  terms  of this  Guarantee  and  thereafter  means  each  such  Successor
Guarantee Trustee.

     "Holder"  means any holder,  as  registered on the books and records of the
Issuer,  of any Capital  Securities;  provided,  however,  that, in  determining
whether the holders of the requisite percentage of Capital Securities have given
any request, notice, consent or waiver hereunder, "Holder" shall not include the
Guarantor or any Affiliate of the Guarantor.

     "Indemnified   Person"  means  the  Guarantee  Trustee  (including  in  its
individual  capacity),  any Affiliate of the Guarantee Trustee, or any officers,
directors,   shareholders,   members,  partners,   employees,   representatives,
nominees, custodians or agents of the Guarantee Trustee.

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<PAGE>

     "Indenture" means the Indenture,  dated as of August 28, 2003,  between the
Guarantor and  Wilmington  Trust  Company,  not in its  individual  capacity but
solely as trustee, and any indenture  supplemental thereto pursuant to which the
Debentures are to be issued to the Institutional Trustee of the Issuer.

     "Liquidation  Distribution"  has the meaning set forth in the definition of
"Guarantee Payments" herein.

     "Majority in liquidation amount of the Capital  Securities" means Holder(s)
of outstanding  Capital  Securities,  voting together as a class, but separately
from the  holders  of  Common  Securities,  of more  than  50% of the  aggregate
liquidation   amount  (including  the  stated  amount  that  would  be  paid  on
redemption,  liquidation or otherwise, plus accrued and unpaid Distributions to,
but excluding, the date upon which the voting percentages are determined) of all
Capital Securities then outstanding.

     "Obligations"  means any costs,  expenses or liabilities (but not including
liabilities  related  to taxes) of the  Issuer,  other than  obligations  of the
Issuer to pay to holders of any Trust  Securities  the amounts due such  holders
pursuant to the terms of the Trust Securities.

     "Officer's  Certificate"  means,  with respect to any Person, a certificate
signed by one  Authorized  Officer of such  Person.  Any  Officer's  Certificate
delivered with respect to compliance  with a condition or covenant  provided for
in this Guarantee shall include:

     (a)  a statement that each officer  signing the Officer's  Certificate  has
          read the covenant or condition and the definitions relating thereto;

     (b)  a brief  statement  of the  nature  and  scope of the  examination  or
          investigation  undertaken  by each officer in rendering  the Officer's
          Certificate;

     (c)  a  statement  that each such  officer  has made  such  examination  or
          investigation  as, in such officer's  opinion,  is necessary to enable
          such officer to express an informed  opinion as to whether or not such
          covenant or condition has been complied with; and

     (d)  a statement as to whether,  in the opinion of each such officer,  such
          condition or covenant has been complied with.

     "Person"  means a legal  person,  including  any  individual,  corporation,
estate, partnership,  joint venture,  association,  joint stock company, limited
liability  company,  trust,  unincorporated  association,  or  government or any
agency or political subdivision thereof, or any other entity of whatever nature.

     "Responsible  Officer" means,  with respect to the Guarantee  Trustee,  any
officer within the Corporate  Trust Office of the Guarantee  Trustee with direct
responsibility for the administration of any matters relating to this Guarantee,
including any vice president,  any assistant vice president,  any secretary, any
assistant secretary,  the treasurer,  any assistant treasurer, any trust officer
or  other  officer  of the  Corporate  Trust  Office  of the  Guarantee  Trustee
customarily  performing functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate trust
matter,  any other  officer  to

                                       3
<PAGE>

whom  such  matter  is  referred  because  of that  officer's  knowledge  of and
familiarity with the particular subject.

     "Successor   Guarantee   Trustee"  means  a  successor   Guarantee  Trustee
possessing the qualifications to act as Guarantee Trustee under Section 3.1.

     "Trust Securities" means the Common Securities and the Capital Securities.


                                   ARTICLE II
               POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

     SECTION 2.1. Powers and Duties of the Guarantee Trustee.

     (a)  This Guarantee shall be held by the Guarantee  Trustee for the benefit
          of the Holders of the Capital  Securities,  and the Guarantee  Trustee
          shall not transfer  this  Guarantee  to any Person  except a Holder of
          Capital  Securities  exercising his or her rights  pursuant to Section
          4.4(b) or to a  Successor  Guarantee  Trustee  on  acceptance  by such
          Successor  Guarantee  Trustee of its  appointment  to act as Successor
          Guarantee  Trustee.  The right,  title and  interest of the  Guarantee
          Trustee shall  automatically vest in any Successor  Guarantee Trustee,
          and such vesting and cessation of title shall be effective  whether or
          not conveyancing  documents have been executed and delivered  pursuant
          to the appointment of such Successor Guarantee Trustee.

     (b)  If an Event of Default actually known to a Responsible  Officer of the
          Guarantee  Trustee  has  occurred  and is  continuing,  the  Guarantee
          Trustee shall enforce this Guarantee for the benefit of the Holders of
          the Capital Securities.

     (c)  The Guarantee  Trustee,  before the occurrence of any Event of Default
          and after the curing or waiving of all Events of Default that may have
          occurred,   shall  undertake  to  perform  only  such  duties  as  are
          specifically  set forth in this  Guarantee,  and no implied  covenants
          shall be read into this Guarantee  against the Guarantee  Trustee.  In
          case an Event of  Default  has  occurred  (that has not been  cured or
          waived  pursuant  to  Section  2.4(b))  and  is  actually  known  to a
          Responsible  Officer of the Guarantee  Trustee,  the Guarantee Trustee
          shall  exercise  such of the rights  and  powers  vested in it by this
          Guarantee,  and use the same degree of care and skill in its  exercise
          thereof,  as  a  prudent  person  would  exercise  or  use  under  the
          circumstances in the conduct of his or her own affairs.

     (d)  No  provision  of this  Guarantee  shall be  construed  to relieve the
          Guarantee Trustee from liability for its own negligent action, its own
          negligent failure to act, or its own willful misconduct, except that:

          (i)  prior to the  occurrence  of any Event of  Default  and after the
               curing  or  waiving  of all  Events  of  Default  that  may  have
               occurred:

               (A)  the duties and obligations of the Guarantee Trustee shall be
                    determined   solely  by  the  express   provisions  of  this
                    Guarantee,  and the  Guarantee  Trustee  shall not be liable
                    except for the performance of such duties and obligations as
                    are specifically set forth in this Guarantee, and no implied

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<PAGE>
                    covenants or  obligations  shall be read into this Guarantee
                    against the Guarantee Trustee; and

               (B)  in the  absence  of bad  faith on the part of the  Guarantee
                    Trustee,  the Guarantee Trustee may conclusively rely, as to
                    the  truth  of the  statements  and the  correctness  of the
                    opinions  expressed   therein,   upon  any  certificates  or
                    opinions  furnished to the Guarantee  Trustee and conforming
                    to the  requirements of this  Guarantee;  but in the case of
                    any such certificates or opinions furnished to the Guarantee
                    Trustee,  the  Guarantee  Trustee  shall  be under a duty to
                    examine the same to  determine  whether or not on their face
                    they conform to the requirements of this Guarantee;

          (ii) the  Guarantee  Trustee  shall  not be  liable  for any  error of
               judgment  made in good  faith  by a  Responsible  Officer  of the
               Guarantee   Trustee,   unless  it  shall  be  proved   that  such
               Responsible  Officer of the  Guarantee  Trustee or the  Guarantee
               Trustee was negligent in  ascertaining  the pertinent  facts upon
               which such judgment was made;

          (iii)the  Guarantee  Trustee  shall not be liable with  respect to any
               action  taken  or  omitted  to be  taken  by it in good  faith in
               accordance with the written  direction of the Holders of not less
               than a Majority in liquidation  amount of the Capital  Securities
               relating  to  the  time,  method  and  place  of  conducting  any
               proceeding for any remedy available to the Guarantee Trustee,  or
               exercising  any  trust or  power  conferred  upon  the  Guarantee
               Trustee under this Guarantee; and

          (iv) no  provision  of this  Guarantee  shall  require  the  Guarantee
               Trustee  to  expend  or risk  its own  funds or  otherwise  incur
               personal  financial  liability in the  performance  of any of its
               duties or in the exercise of any of its rights or powers,  if the
               Guarantee  Trustee  shall have  reasonable  grounds for believing
               that the repayment of such funds is not reasonably  assured to it
               under the terms of this  Guarantee,  or security  and  indemnity,
               reasonably  satisfactory to the Guarantee  Trustee,  against such
               risk or liability is not reasonably assured to it.

     SECTION 2.2. Certain Rights of the Guarantee Trustee.

     (a)  Subject to the provisions of Section 2.1:

          (i)  The Guarantee  Trustee may conclusively  rely, and shall be fully
               protected  in  acting  or  refraining   from  acting  upon,   any
               resolution,  certificate, statement, instrument, opinion, report,
               notice,  request,  direction,  consent,  order, bond,  debenture,
               note,  other evidence of  indebtedness or other paper or document
               believed  by it to be genuine  and to have been  signed,  sent or
               presented by the proper party or parties.

          (ii) Any  direction  or act  of the  Guarantor  contemplated  by  this
               Guarantee  shall  be  sufficiently   evidenced  by  an  Officer's
               Certificate.

          (iii)Whenever, in the administration of this Guarantee,  the Guarantee
               Trustee  shall  deem it  desirable  that a matter  be  proved  or
               established  before  taking,  suffering  or  omitting  any action
               hereunder, the Guarantee Trustee (unless other evidence is herein

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<PAGE>

               specifically  prescribed) may, in the absence of bad faith on its
               part, request and conclusively rely upon an Officer's Certificate
               of the Guarantor  which,  upon receipt of such request,  shall be
               promptly delivered by the Guarantor.

          (iv) The Guarantee Trustee shall have no duty to see to any recording,
               filing or registration of any instrument or other writing (or any
               rerecording, refiling or re-registration thereof).

          (v)  The Guarantee  Trustee may consult with counsel of its selection,
               and the advice or opinion of such  counsel  with respect to legal
               matters shall be full and complete  authorization  and protection
               in  respect  of any  action  taken,  suffered  or  omitted  by it
               hereunder  in good faith and in  accordance  with such  advice or
               opinion.  Such counsel may be counsel to the  Guarantor or any of
               its  Affiliates  and  may  include  any  of  its  employees.  The
               Guarantee  Trustee  shall  have  the  right  at any  time to seek
               instructions concerning the administration of this Guarantee from
               any court of competent jurisdiction.

          (vi) The  Guarantee  Trustee  shall be under no obligation to exercise
               any of the rights or powers vested in it by this Guarantee at the
               request or direction of any Holder, unless such Holder shall have
               provided to the Guarantee  Trustee such  security and  indemnity,
               reasonably  satisfactory  to the Guarantee  Trustee,  against the
               costs,  expenses (including  attorneys' fees and expenses and the
               expenses  of  the  Guarantee   Trustee's   agents,   nominees  or
               custodians)  and  liabilities  that  might be  incurred  by it in
               complying   with  such  request  or  direction,   including  such
               reasonable advances as may be requested by the Guarantee Trustee;
               provided,   however,  that  nothing  contained  in  this  Section
               2.2(a)(vi) shall be taken to relieve the Guarantee Trustee,  upon
               the  occurrence  of an Event of  Default,  of its  obligation  to
               exercise the rights and powers vested in it by this Guarantee.

          (vii)The   Guarantee   Trustee   shall   not  be  bound  to  make  any
               investigation into the facts or matters stated in any resolution,
               certificate,  statement,  instrument,  opinion,  report,  notice,
               request, direction,  consent, order, bond, debenture, note, other
               evidence  of  indebtedness  or other paper or  document,  but the
               Guarantee  Trustee,  in its  discretion,  may make  such  further
               inquiry or investigation into such facts or matters as it may see
               fit.

          (viii) The  Guarantee  Trustee may execute any of the trusts or powers
               hereunder or perform any duties  hereunder  either directly or by
               or through  agents,  nominees,  custodians or attorneys,  and the
               Guarantee  Trustee shall not be responsible for any misconduct or
               negligence  on the part of any agent or attorney  appointed  with
               due care by it hereunder.

          (ix) Any action taken by the Guarantee Trustee or its agents hereunder
               shall  bind  the  Holders  of the  Capital  Securities,  and  the
               signature of the  Guarantee  Trustee or its agents alone shall be
               sufficient  and  effective to perform any such  action.  No third
               party  shall be required  to inquire as to the  authority  of the
               Guarantee  Trustee to so act or as to its compliance  with any of
               the terms and provisions of this  Guarantee,  both of which shall
               be  conclusively  evidenced  by the  Guarantee  Trustee's  or its
               agent's taking such action.

                                       6
<PAGE>

          (x)  Whenever in the  administration  of this  Guarantee the Guarantee
               Trustee  shall deem it  desirable  to receive  instructions  with
               respect  to  enforcing  any  remedy or right or taking  any other
               action   hereunder,   the  Guarantee   Trustee  (A)  may  request
               instructions from the Holders of a Majority in liquidation amount
               of the Capital  Securities,  (B) may refrain from  enforcing such
               remedy  or  right  or  taking  such  other   action   until  such
               instructions   are   received  and  (C)  shall  be  protected  in
               conclusively  relying  on  or  acting  in  accordance  with  such
               instructions.

          (xi) The  Guarantee  Trustee shall not be liable for any action taken,
               suffered,  or  omitted  to  be  taken  by it in  good  faith  and
               reasonably  believed  by  it  to  be  authorized  or  within  the
               discretion  or  rights  or  powers  conferred  upon  it  by  this
               Guarantee.

     (b)  No provision of this  Guarantee  shall be deemed to impose any duty or
          obligation  on the  Guarantee  Trustee to  perform  any act or acts or
          exercise any right, power, duty or obligation  conferred or imposed on
          it, in any  jurisdiction  in which it shall be illegal or in which the
          Guarantee  Trustee shall be  unqualified  or incompetent in accordance
          with applicable law to perform any such act or acts or to exercise any
          such  right,  power,  duty  or  obligation.  No  permissive  power  or
          authority  available to the Guarantee Trustee shall be construed to be
          a duty.

     SECTION 2.3. Not Responsible for Recitals or Issuance of Guarantee.


     The recitals  contained in this Guarantee  shall be taken as the statements
of the Guarantor,  and the Guarantee Trustee does not assume any  responsibility
for their  correctness.  The Guarantee Trustee makes no representation as to the
validity or sufficiency of this Guarantee.

     SECTION 2.4. Events of Default; Waiver.

     (a)  An Event of Default under this  Guarantee  will occur upon the failure
          of the  Guarantor  to perform any of its payment or other  obligations
          hereunder.

     (b)  The  Holders  of a  Majority  in  liquidation  amount  of the  Capital
          Securities  may,  voting or  consenting  as a class,  on behalf of the
          Holders  of all of the  Capital  Securities,  waive any past  Event of
          Default  and its  consequences.  Upon such  waiver,  any such Event of
          Default shall cease to exist,  and shall be deemed to have been cured,
          for every purpose of this  Guarantee,  but no such waiver shall extend
          to any  subsequent  or other default or Event of Default or impair any
          right consequent thereon.

     SECTION 2.5. Events of Default; Notice.

     (a)  The Guarantee Trustee shall, within 90 days after the occurrence of an
          Event of Default,  transmit by mail, first class postage  prepaid,  to
          the  Holders  of the  Capital  Securities,  notices  of all  Events of
          Default  actually  known to a  Responsible  Officer  of the  Guarantee
          Trustee,  unless such  defaults  have been cured  before the giving of
          such notice,  provided,  however,  that the Guarantee Trustee shall be
          protected in  withholding  such notice if and so long as a Responsible
          Officer of the  Guarantee  Trustee in good faith  determines  that the
          withholding  of such notice is in the  interests of the Holders of the
          Capital Securities.

                                       7
<PAGE>

     (b)  The Guarantee Trustee shall not be charged with knowledge of any Event
          of Default  unless the Guarantee  Trustee shall have received  written
          notice  thereof  from  the  Guarantor  or  a  Holder  of  the  Capital
          Securities,  or a Responsible Officer of the Guarantee Trustee charged
          with the  administration of this Guarantee shall have actual knowledge
          thereof.


                                   ARTICLE III
                              THE GUARANTEE TRUSTEE

     SECTION 3.1. The Guarantee Trustee; Eligibility.


     (a)  There shall at all times be a Guarantee Trustee which shall:

          (i)  not be an Affiliate of the Guarantor; and

          (ii) be a  corporation  or national  association  organized  and doing
               business  under the laws of the  United  States of America or any
               state or territory  thereof or of the  District of  Columbia,  or
               Person  authorized  under such laws to exercise  corporate  trust
               powers,  having a  combined  capital  and  surplus of at least 50
               million U.S. dollars ($50,000,000), and subject to supervision or
               examination  by  federal,  state,   territorial  or  District  of
               Columbia authority.  If such corporation or national  association
               publishes reports of condition at least annually, pursuant to law
               or to the requirements of the supervising or examining  authority
               referred  to  above,  then,  for the  purposes  of  this  Section
               3.1(a)(ii),  the combined capital and surplus of such corporation
               or  national  association  shall  be  deemed  to be its  combined
               capital  and  surplus as set forth in its most  recent  report of
               condition so published.

     (b)  If at any time the Guarantee  Trustee shall cease to be eligible to so
          act under  Section  3.1(a),  the Guarantee  Trustee shall  immediately
          resign in the manner and with the effect set forth in Section 3.2(c).

     (c)  If  the  Guarantee  Trustee  has or  shall  acquire  any  "conflicting
          interest"  within the meaning of Section 310(b) of the Trust Indenture
          Act, the  Guarantee  Trustee shall either  eliminate  such interest or
          resign to the extent and in the manner  provided  by, and  subject to,
          this Guarantee.

     SECTION 3.2. Appointment, Removal and Resignation of the Guarantee Trustee.

     (a)  Subject to Section 3.2(b),  the Guarantee  Trustee may be appointed or
          removed  without cause at any time by the  Guarantor  except during an
          Event of Default.

     (b)  The Guarantee  Trustee shall not be removed in accordance with Section
          3.2(a) until a Successor  Guarantee Trustee has been appointed and has
          accepted  such  appointment  by written  instrument  executed  by such
          Successor Guarantee Trustee and delivered to the Guarantor.

     (c)  The  Guarantee  Trustee  appointed to office shall hold office until a
          Successor  Guarantee  Trustee  shall have been  appointed or until its
          removal or resignation.  The Guarantee  Trustee may resign from office
          (without need for prior or subsequent  accounting) by an instrument in
          writing  executed  by  the  Guarantee  Trustee  and  delivered  to the
          Guarantor,  which

                                       8
<PAGE>

          resignation shall not take effect until a Successor  Guarantee Trustee
          has been appointed and has accepted such  appointment by an instrument
          in writing executed by such Successor  Guarantee Trustee and delivered
          to the Guarantor and the resigning Guarantee Trustee.

     (d)  If no  Successor  Guarantee  Trustee  shall  have been  appointed  and
          accepted  appointment  as provided in this  Section 3.2 within 60 days
          after  delivery  of an  instrument  of  removal  or  resignation,  the
          Guarantee Trustee resigning or being removed may petition any court of
          competent  jurisdiction  for  appointment  of  a  Successor  Guarantee
          Trustee.  Such court may thereupon,  after prescribing such notice, if
          any, as it may deem proper, appoint a Successor Guarantee Trustee.

     (e)  No Guarantee  Trustee shall be liable for the acts or omissions to act
          of any Successor Guarantee Trustee.

     (f)  Upon  termination  of this  Guarantee or removal or resignation of the
          Guarantee  Trustee  pursuant to this Section 3.2, the Guarantor  shall
          pay to the  Guarantee  Trustee  all  amounts  owing  to the  Guarantee
          Trustee  under  Sections  7.2  and  7.3  accrued  to the  date of such
          termination, removal or resignation.



                                   ARTICLE IV
                                    GUARANTEE

     SECTION 4.1. Guarantee.

     (a)  The Guarantor irrevocably and unconditionally agrees to pay in full to
          the Holders the Guarantee  Payments  (without  duplication  of amounts
          theretofore  paid by the Issuer),  as and when due,  regardless of any
          defense (except as defense of payment by the Issuer), right of set-off
          or  counterclaim  that the Issuer may have or assert.  The Guarantor's
          obligation  to make a  Guarantee  Payment may be  satisfied  by direct
          payment of the required  amounts by the Guarantor to the Holders or by
          causing the Issuer to pay such amounts to the Holders.

     (b)  The Guarantor  hereby also agrees to assume any and all Obligations of
          the Issuer  and in the event any such  Obligation  is not so  assumed,
          subject  to the terms and  conditions  hereof,  the  Guarantor  hereby
          irrevocably  and  unconditionally  guarantees to each  Beneficiary the
          full  payment,  when and as due,  of any and all  Obligations  to such
          Beneficiaries.  This Guarantee is intended to be for the Beneficiaries
          who have received notice hereof.

     SECTION 4.2. Waiver of Notice and Demand.

     The Guarantor  hereby waives notice of acceptance of this  Guarantee and of
any liability to which it applies or may apply, presentment, demand for payment,
any right to require a proceeding  first  against the Issuer or any other Person
before proceeding against the Guarantor,  protest, notice of nonpayment,  notice
of dishonor, notice of redemption and all other notices and demands.

                                       9
<PAGE>

         SECTION 4.3. Obligations Not Affected.

     The  obligations,  covenants,  agreements and duties of the Guarantor under
this  Guarantee  shall  in no way be  affected  or  impaired  by  reason  of the
happening from time to time of any of the following: (e) (f) (g)

     (a)  the  release or  waiver,  by  operation  of law or  otherwise,  of the
          performance  or  observance  by the  Issuer of any  express or implied
          agreement,  covenant,  term  or  condition  relating  to  the  Capital
          Securities to be performed or observed by the Issuer;

     (b)  the  extension  of time for the  payment  by the  Issuer of all or any
          portion of the  Distributions,  Redemption Price,  Special  Redemption
          Price,  Liquidation  Distribution  or any other sums payable under the
          terms  of the  Capital  Securities  or the  extension  of time for the
          performance  of any  other  obligation  under,  arising  out of, or in
          connection  with, the Capital  Securities  (other than an extension of
          time for the payment of the Distributions,  Redemption Price,  Special
          Redemption Price,  Liquidation Distribution or other sums payable that
          results  from the  extension  of any  interest  payment  period on the
          Debentures  or any  extension of the maturity  date of the  Debentures
          permitted by the Indenture);

     (c)  any failure,  omission,  delay or lack of diligence on the part of the
          Holders to enforce, assert or exercise any right, privilege,  power or
          remedy  conferred on the Holders  pursuant to the terms of the Capital
          Securities,  or  any  action  on  the  part  of  the  Issuer  granting
          indulgence or extension of any kind;

     (d)  the voluntary or  involuntary  liquidation,  dissolution,  sale of any
          collateral,  receivership,  insolvency, bankruptcy, assignment for the
          benefit of  creditors,  reorganization,  arrangement,  composition  or
          readjustment of debt of, or other similar proceedings  affecting,  the
          Issuer or any of the assets of the Issuer;

     (e)  any invalidity of, or defect or deficiency in, the Capital Securities;

     (f)  the  settlement or compromise of any obligation  guaranteed  hereby or
          hereby incurred; or

     (g)  any other  circumstance  whatsoever that might otherwise  constitute a
          legal or equitable  discharge or defense of a guarantor,  it being the
          intent  of this  Section  4.3 that the  obligations  of the  Guarantor
          hereunder  shall  be  absolute  and  unconditional  under  any and all
          circumstances.

     There  shall be no  obligation  of the Holders to give notice to, or obtain
consent of, the Guarantor with respect to the happening of any of the foregoing.

     SECTION 4.4. Rights of Holders.

     (a)  The  Holders  of a  Majority  in  liquidation  amount  of the  Capital
          Securities  have the right to direct  the  time,  method  and place of
          conducting any  proceeding  for any remedy  available to the Guarantee
          Trustee in respect of this  Guarantee or to direct the exercise of any
          trust or  power  conferred  upon  the  Guarantee  Trustee  under  this
          Guarantee;  provided,  however, that (subject to Sections 2.1 and 2.2)
          the  Guarantee  Trustee  shall have the right to decline to follow

                                       10
<PAGE>

          any such direction if the Guarantee  Trustee shall  determine that the
          actions so directed  would be unjustly  prejudicial to the Holders not
          taking  part in  such  direction  or if the  Guarantee  Trustee  being
          advised by legal counsel  determines  that the action or proceeding so
          directed may not lawfully be taken or if the Guarantee Trustee in good
          faith by its board of directors or trustees,  executive committee or a
          trust committee of directors or trustees and/or  Responsible  Officers
          shall  determine  that the  action or  proceeding  so  directed  would
          involve the Guarantee Trustee in personal liability.

     (b)  Any Holder of Capital  Securities  may  institute  a legal  proceeding
          directly  against the  Guarantor  to enforce the  Guarantee  Trustee's
          rights  under  this  Guarantee,  without  first  instituting  a  legal
          proceeding  against the  Issuer,  the  Guarantee  Trustee or any other
          Person.  The Guarantor  waives any right or remedy to require that any
          such action be brought first against the Issuer, the Guarantee Trustee
          or  any  other  Person  before  so  proceeding  directly  against  the
          Guarantor.

     SECTION 4.5. Guarantee of Payment.

     This Guarantee creates a guarantee of payment and not of collection.

     SECTION 4.6. Subrogation.

     The Guarantor  shall be subrogated to all (if any) rights of the Holders of
Capital  Securities  against the Issuer in respect of any  amounts  paid to such
Holders by the  Guarantor  under this  Guarantee;  provided,  however,  that the
Guarantor shall not (except to the extent  required by applicable  provisions of
law) be entitled to enforce or exercise  any right that it may acquire by way of
subrogation or any indemnity,  reimbursement or other agreement, in all cases as
a result of payment  under this  Guarantee,  if, after giving effect to any such
payment,  any amounts  are due and unpaid  under this  Guarantee.  If any amount
shall be paid to the  Guarantor  in  violation of the  preceding  sentence,  the
Guarantor  agrees to hold such  amount in trust for the  Holders and to pay over
such amount to the Holders.

     SECTION 4.7. Independent Obligations.

     The Guarantor  acknowledges that its obligations  hereunder are independent
of the obligations of the Issuer with respect to the Capital Securities and that
the  Guarantor  shall be liable as  principal  and as debtor  hereunder  to make
Guarantee Payments pursuant to the terms of this Guarantee  notwithstanding  the
occurrence of any event referred to in subsections  (a) through (g),  inclusive,
of Section 4.3 hereof.

     SECTION 4.8. Enforcement.

     A Beneficiary  may enforce the  Obligations  of the Guarantor  contained in
Section  4.1(b)  directly  against the Guarantor,  and the Guarantor  waives any
right or remedy to require that any action be brought  against the Issuer or any
other person or entity before proceeding against the Guarantor.

     The Guarantor shall be subrogated to all rights (if any) of any Beneficiary
against the Issuer in respect of any amounts  paid to the  Beneficiaries  by the
Guarantor under this Guarantee;  provided, however, that the Guarantor shall not
(except to the extent  required by applicable

                                       11
<PAGE>

provisions  of law) be entitled  to enforce or  exercise  any rights that it may
acquire  by  way  of  subrogation  or  any  indemnity,  reimbursement  or  other
agreement,  in all cases as a result of payment under this Guarantee,  if, after
giving  effect to such  payment,  any  amounts  are due and  unpaid  under  this
Guarantee.


                                    ARTICLE V
                    LIMITATION OF TRANSACTIONS; SUBORDINATION

     SECTION 5.1. Limitation of Transactions.

     So long as any Capital  Securities remain  outstanding,  if (a) there shall
have occurred and be  continuing an Event of Default or (b) the Guarantor  shall
have  selected  an  Extension  Period as provided  in the  Declaration  and such
period, or any extension thereof,  shall have commenced and be continuing,  then
the Guarantor may not (x) declare or pay any dividends or  distributions  on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
the  Guarantor's  capital  stock or (y)  make any  payment  of  principal  of or
interest  or  premium,  if any,  on or  repay,  repurchase  or  redeem  any debt
securities of the Guarantor  that rank pari passu in all respects with or junior
in interest to the  Debentures  (other than (i) payments  under this  Guarantee,
(ii) repurchases,  redemptions or other  acquisitions of shares of capital stock
of the Guarantor (A) in connection with any employment contract, benefit plan or
other  similar  arrangement  with or for the  benefit of one or more  employees,
officers,   directors,  or  consultants,  (B)  in  connection  with  a  dividend
reinvestment  or stockholder  stock purchase plan or (C) in connection  with the
issuance of capital stock of the Guarantor (or  securities  convertible  into or
exercisable  for  such  capital  stock),  as  consideration  in  an  acquisition
transaction  entered into prior to the occurrence of the Event of Default or the
applicable  Extension Period, (iii) as a result of any exchange or conversion of
any class or series of the Guarantor's  capital stock (or any capital stock of a
subsidiary of the Guarantor) for any class or series of the Guarantor's  capital
stock or of any class or series of the Guarantor's indebtedness for any class or
series  of the  Guarantor's  capital  stock,  (iv) the  purchase  of  fractional
interests in shares of the Guarantor's  capital stock pursuant to the conversion
or exchange  provisions of such capital stock or the security being converted or
exchanged,   (v)  any   declaration  of  a  dividend  in  connection   with  any
stockholder's  rights plan, or the issuance of rights,  stock or other  property
under any  stockholder's  rights plan, or the redemption or repurchase of rights
pursuant thereto, or (vi) any dividend in the form of stock,  warrants,  options
or other rights where the dividend  stock or the stock issuable upon exercise of
such  warrants,  options or other  rights is the same stock as that on which the
dividend is being paid or ranks pari passu with or junior to such stock).

     SECTION 5.2. Ranking.

     This Guarantee will constitute an unsecured obligation of the Guarantor and
will rank  subordinate  and junior in right of payment to all present and future
Senior  Indebtedness  (as defined in the Indenture) of the  Guarantor.  By their
acceptance  thereof,  each Holder of Capital  Securities agrees to the foregoing
provisions of this Guarantee and the other terms set forth herein.

                                       12
<PAGE>

                                   ARTICLE  VI
                                   TERMINATION

     SECTION 6.1. Termination.

     This Guarantee shall  terminate as to the Capital  Securities (i) upon full
payment of the Redemption Price or the Special Redemption Price, as the case may
be, of all Capital  Securities then  outstanding,  (ii) upon the distribution of
all of the  Debentures to the Holders of all of the Capital  Securities or (iii)
upon full payment of the amounts payable in accordance with the Declaration upon
dissolution of the Issuer.  This Guarantee will continue to be effective or will
be  reinstated,  as the  case  may be,  if at any time  any  Holder  of  Capital
Securities must restore payment of any sums paid under the Capital Securities or
under this Guarantee.


                                   ARTICLE VII
                                 INDEMNIFICATION

     SECTION 7.1. Exculpation.

     (a)  No Indemnified  Person shall be liable,  responsible or accountable in
          damages or  otherwise to the  Guarantor or any Covered  Person for any
          loss,  damage or claim  incurred  by reason of any act or  omission of
          such  Indemnified  Person  in  good  faith  in  accordance  with  this
          Guarantee  and in a manner  that such  Indemnified  Person  reasonably
          believed  to be within the scope of the  authority  conferred  on such
          Indemnified  Person  by  this  Guarantee  or by  law,  except  that an
          Indemnified  Person shall be liable for any such loss, damage or claim
          incurred by reason of such Indemnified  Person's negligence or willful
          misconduct with respect to such acts or omissions.

     (b)  An  Indemnified  Person  shall be fully  protected  in relying in good
          faith upon the  records of the Issuer or the  Guarantor  and upon such
          information,  opinions,  reports or statements presented to the Issuer
          or the  Guarantor by any Person as to matters the  Indemnified  Person
          reasonably  believes are within such other  Person's  professional  or
          expert competence and who, if selected by such Indemnified Person, has
          been  selected  with  reasonable  care  by  such  Indemnified  Person,
          including information, opinions, reports or statements as to the value
          and amount of the assets,  liabilities,  profits, losses, or any other
          facts  pertinent  to the  existence  and  amount of assets  from which
          Distributions to Holders of Capital Securities might properly be paid.

     SECTION 7.2. Indemnification.

     (a)  The Guarantor agrees to indemnify each Indemnified  Person for, and to
          hold  each  Indemnified  Person  harmless  against,  any and all loss,
          liability,  damage,  claim or expense incurred  without  negligence or
          willful misconduct on the part of the Indemnified Person,  arising out
          of or in connection with the acceptance or administration of the trust
          or  trusts  hereunder,  including  but not  limited  to the  costs and
          expenses  (including  reasonable  legal  fees  and  expenses)  of  the
          Indemnified  Person defending itself against,  or  investigating,  any
          claim or liability in connection  with the exercise or  performance of
          any of the  Indemnified  Person's  powers  or  duties  hereunder.  The
          obligation to indemnify as set forth in this Section 7.2 shall

                                       13
<PAGE>

          survive the  resignation  or removal of the Guarantee  Trustee and the
          termination of this Guarantee.

     (b)  Promptly after receipt by an Indemnified Person under this Section 7.2
          of notice of the commencement of any action,  such Indemnified  Person
          will,  if a  claim  in  respect  thereof  is to be  made  against  the
          Guarantor  under this Section 7.2,  notify the Guarantor in writing of
          the commencement  thereof;  but the failure so to notify the Guarantor
          (i) will not relieve the Guarantor from liability  under paragraph (a)
          above unless and to the extent that the  Guarantor  did not  otherwise
          learn of such action and such failure results in the forfeiture by the
          Guarantor of substantial rights and defenses and (ii) will not, in any
          event,  relieve the Guarantor from any  obligations to any Indemnified
          Person other than the indemnification obligation provided in paragraph
          (a) above.  The Guarantor  shall be entitled to appoint counsel of the
          Guarantor's  choice  at  the  Guarantor's  expense  to  represent  the
          Indemnified  Person in any action for which  indemnification is sought
          (in which case the Guarantor  shall not thereafter be responsible  for
          the  fees  and  expenses  of  any  separate  counsel  retained  by the
          Indemnified  Person or Persons  except as set forth below);  provided,
          however,  that such counsel shall be  satisfactory  to the Indemnified
          Person. Notwithstanding the Guarantor's election to appoint counsel to
          represent the Indemnified Person in any action, the Indemnified Person
          shall  have the  right to employ  separate  counsel  (including  local
          counsel),  and the Guarantor shall bear the reasonable fees, costs and
          expenses of such separate counsel, if (i) the use of counsel chosen by
          the Guarantor to represent the  Indemnified  Person would present such
          counsel  with a conflict  of  interest,  (ii) the actual or  potential
          defendants  in,  or  targets  of,  any such  action  include  both the
          Indemnified  Person and the Guarantor and the Indemnified Person shall
          have reasonably  concluded that there may be legal defenses  available
          to it and/or other  Indemnified  Persons which are  different  from or
          additional to those  available to the  Guarantor,  (iii) the Guarantor
          shall not have employed counsel satisfactory to the Indemnified Person
          to represent the  Indemnified  Person  within a reasonable  time after
          notice of the  institution of such action or (iv) the Guarantor  shall
          authorize the  Indemnified  Person to employ  separate  counsel at the
          expense of the Guarantor.  The Guarantor  will not,  without the prior
          written  consent of the Indemnified  Persons,  settle or compromise or
          consent to the entry of any  judgment  with  respect to any pending or
          threatened  claim,  action,  suit or  proceeding  in  respect of which
          indemnification  or contribution may be sought  hereunder  (whether or
          not the  Indemnified  Persons are actual or potential  parties to such
          claim  or  action)  unless  such  settlement,  compromise  or  consent
          includes an unconditional  release of each Indemnified Person from all
          liability arising out of such claim, action, suit or proceeding.

     SECTION 7.3. Compensation; Reimbursement of Expenses.

     The Guarantor agrees:

     (a)  to pay to the  Guarantee  Trustee from time to time such  compensation
          for all services  rendered by it hereunder as the parties  shall agree
          to from time to time (which  compensation  shall not be limited by any
          provision  of law in regard  to the  compensation  of a trustee  of an
          express trust); and

     (b)  except as  otherwise  expressly  provided  herein,  to  reimburse  the
          Guarantee   Trustee   upon  request  for  all   reasonable   expenses,
          disbursements  and advances  incurred or made by it in accordance with
          any provision of this Guarantee (including the reasonable compensation
          and the

                                       14
<PAGE>

          expenses and disbursements of its agents and counsel), except any such
          expense,  disbursement  or  advance  as  may  be  attributable  to its
          negligence or willful misconduct.

     The provisions of this Section 7.3 shall survive the resignation or removal
of the Guarantee Trustee and the termination of this Guarantee.


                                  ARTICLE VIII
                                  MISCELLANEOUS

     SECTION 8.1. Successors and Assigns.

     All guarantees and  agreements  contained in this Guarantee  shall bind the
successors,  assigns,  receivers,  trustees and representatives of the Guarantor
and shall inure to the benefit of the  Holders of the  Capital  Securities  then
outstanding.  Except  in  connection  with any  merger or  consolidation  of the
Guarantor  with or into  another  entity or any sale,  transfer  or lease of the
Guarantor's assets to another entity, in each case to the extent permitted under
the  Indenture,  the  Guarantor  may not  assign  its  rights  or  delegate  its
obligations  under this  Guarantee  without the prior approval of the Holders of
not less than a Majority in liquidation amount of the Capital Securities.

     SECTION 8.2. Amendments.

     Except with respect to any changes that do not adversely  affect the rights
of Holders of the Capital  Securities in any material  respect (in which case no
consent of Holders will be  required),  this  Guarantee may be amended only with
the prior  approval of the  Holders of not less than a Majority  in  liquidation
amount of the Capital Securities. The provisions of the Declaration with respect
to  amendments  thereof  shall apply  equally with respect to  amendments of the
Guarantee.

     SECTION 8.3. Notices.

     All notices provided for in this Guarantee shall be in writing, duly signed
by the party giving such notice, and shall be delivered, telecopied or mailed by
first class mail, as follows:

     (a)  If given to the Guarantee Trustee,  at the Guarantee Trustee's mailing
          address  set  forth  below (or such  other  address  as the  Guarantee
          Trustee may give notice of to the Holders of the Capital Securities):

                           Wilmington Trust Company
                           Rodney Square North
                           1100 North Market Street
                           Wilmington, DE 19890-0001
                           Attention: Corporate Trust Administrator
                           Telecopy:   302-651-8882
                           Telephone: 302-651-1000

     (b)  If given to the  Guarantor,  at the  Guarantor's  mailing  address set
          forth below (or such other address as the Guarantor may give notice of
          to  the  Holders  of the  Capital  Securities  and  to  the  Guarantee
          Trustee):

                                       15
<PAGE>

                           Appalachian Bancshares, Inc.
                           829 Industrial Boulevard
                           Ellijay, GA 30540
                           Attention: Darren Cantlay
                           Telecopy:   706-276-8195
                           Telephone: 706-276-8000

     (c)  If given to any Holder of the Capital  Securities,  at the address set
          forth on the books and records of the Issuer.

     All such  notices  shall be deemed  to have been  given  when  received  in
person,  telecopied  with  receipt  confirmed,  or mailed by first  class  mail,
postage  prepaid,  except that if a notice or other document is refused delivery
or cannot be  delivered  because  of a changed  address  of which no notice  was
given,  such notice or other  document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.

     SECTION 8.4. Benefit.

     This  Guarantee  is solely for the  benefit of the  Holders of the  Capital
Securities and, subject to Section 2.1(a),  is not separately  transferable from
the Capital Securities.

     SECTION 8.5. Governing Law.

     THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE  WITH, THE
LAW OF THE STATE OF NEW YORK,  WITHOUT  REGARD TO  CONFLICT  OF LAWS  PRINCIPLES
THEREOF.

     SECTION 8.6. Counterparts.

     This Guarantee may contain more than one  counterpart of the signature page
and this  Guarantee  may be executed by the  affixing  of the  signature  of the
Guarantor and the Guarantee Trustee to any of such counterpart  signature pages.
All of such  counterpart  signature  pages shall be read as though one, and they
shall have the same force and effect as though all of the  signers  had signed a
single signature page.

     THIS GUARANTEE is executed as of the day and year first above written.

                                  Appalachian Bancshares, Inc., as Guarantor


                                  By:
                                     -------------------------------------------
                                     Name:
                                     Title:

                                  Wilmington Trust Company, as Guarantee Trustee

                                  By:
                                     -------------------------------------------
                                     Name:
                                     Title:


                                       16

</TEXT>
</DOCUMENT>
