##### Table of Contents

2005

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UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



for the transition period from  to



Commission file number 1-14105



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AVALON HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Ohio                                                           |  | 34-1863889                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|One American Way, Warren, Ohio                                 |  | 44484-5555                          
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code: (330) 856-8800



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Indicate by a 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 ̈



The registrant had 3,190,786 shares of its Class A Common Stock and 612,545 shares of its
Class B Common Stock outstanding as of August 9, 2005.



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##### Table of Contents

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES



INDEX



|                                                                                                                      |  |      |  | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---- |  | 
|                                                                                                                      |  | Page
|PART I. FINANCIAL INFORMATION                                                                                         |  |     
|                                                                                                                      | 
|Item 1.    
Financial Statements                                                                                      |  |     
|                                                                                                                      | 
|Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004 (Unaudited) |  | 3   
|                                                                                                                      | 
|Condensed Consolidated Balance Sheets at June 30, 2005 (Unaudited) and December 31, 2004                              |  | 4   
|                                                                                                                      | 
|Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (Unaudited)           |  | 5   
|                                                                                                                      | 
|Notes to Condensed Consolidated Financial Statements (Unaudited)                                                      |  | 6   
|                                                                                                                      | 
|Item 2.    
Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 12  
|                                                                                                                      | 
|Item 3.    
Quantitative and Qualitative Disclosures about Market Risk                                                |  | 18  
|                                                                                                                      | 
|Item 4.    
Controls and Procedures                                                                                   |  | 19  
|                                                                                                                      | 
|PART II. OTHER INFORMATION                                                                                            |  |     
|                                                                                                                      | 
|Item 1.    
Legal Proceedings                                                                                         |  | 20  
|                                                                                                                      | 
|Item 2.    
Changes in Securities and Use of Proceeds                                                                 |  | 20  
|                                                                                                                      | 
|Item 3.    
Defaults upon Senior Securities                                                                           |  | 20  
|                                                                                                                      | 
|Item 4.    
Submission of Matters to a Vote of Security Holders                                                       |  | 20  
|                                                                                                                      | 
|Item 5.    
Other Information                                                                                         |  | 20  
|                                                                                                                      | 
|Item 6.    
Exhibits and Reports on Form 8-K                                                                          |  | 20  
|                                                                                                                      | 
|SIGNATURE                                                                                                             |  | 21  





2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



AVALON HOLDINGS
CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)



|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                               |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                               |  | 2005                       |       |   | 2004                     |   |        | 2005 |  |   | 2004   |  
|Net operating revenues                                         |  | $                          | 8,739 |   |                          | $ | 7,262  |      |  | $ | 16,169 |   |  | $ | 13,501 |  
|                                                               |  |                            |       |  
|Costs and expenses:                                            |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Costs of operations                                            |  |                            | 7,345 |   |                          |   | 5,866  |      |  |   | 13,583 |   |  |   | 11,071 |  
|Selling, general and administrative expenses                   |  |                            | 1,568 |   |                          |   | 1,547  |      |  |   | 2,836  |   |  |   | 3,068  |  
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating loss from continuing operations                      |  |                            | (174  | ) |                          |   | (151   | )    |  |   | (250   | ) |  |   | (638   | )
|                                                               |  |                            |       |  
|Other income (expense):                                        |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Interest expense                                               |  |                            | (4    | ) |                          |   | (3     | )    |  |   | (7     | ) |  |   | (7     | )
|Interest income                                                |  |                            | 78    |   |                          |   | 40     |      |  |   | 142    |   |  |   | 77     |  
|Other income, net                                              |  |                            | 35    |   |                          |   | 30     |      |  |   | 82     |   |  |   | 73     |  
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loss from continuing operations before income taxes            |  |                            | (65   | ) |                          |   | (84    | )    |  |   | (33    | ) |  |   | (495   | )
|                                                               |  |                            |       |  
|Provision (benefit) for income taxes                           |  |                            |      |   |                          |   |       |      |  |   |       |   |  |   |       |  
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loss from continuing operations                                |  |                            | (65   | ) |                          |   | (84    | )    |  |   | (33    | ) |  |   | (495   | )
|                                                               |  |                            |       |  
|Discontinued operations:                                       |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|(Loss) income from discontinued operations before income taxes |  |                            | (10   | ) |                          |   | (2,414 | )    |  |   | 70     |   |  |   | (3,028 | )
|Provision (benefit) for income taxes                           |  |                            |      |   |                          |   |       |      |  |   |       |   |  |   |       |  
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|(Loss) income from discontinued operations                     |  |                            | (10   | ) |                          |   | (2,414 | )    |  |   | 70     |   |  |   | (3,028 | )
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net (loss) income                                              |  | $                          | (75   | ) |                          | $ | (2,498 | )    |  | $ | 37     |   |  | $ | (3,523 | )
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loss per share from continuing operations                  |  | $                          | (.02  | ) |                          | $ | (.02   | )    |  | $ | (.01   | ) |  | $ | (.13   | )
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net (loss) income per share from discontinued operations       |  | $                          |      |   |                          | $ | (.64   | )    |  | $ | .02    |   |  | $ | (.80   | )
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net (loss) income per share (Note 2)                           |  | $                          | (.02  | ) |                          | $ | (.66   | )    |  | $ | .01    |   |  | $ | (.93   | )
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding (Note 2)                   |  |                            | 3,803 |   |                          |   | 3,803  |      |  |   | 3,803  |   |  |   | 3,803  |  
|                                                               |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  



See accompanying notes to condensed
consolidated financial statements.



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##### Table of Contents

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)



|                                                                                                                      |  |               |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                      |  | June 30, 2005 |         |   | December 31,2004 |  
|                                                                                                                      |  | (Unaudited)   |         |   |                  |  
|Assets:                                                                                                               |  |               |         |   |                  |   |         |  
|Current Assets:                                                                                                       |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                             |  | $             | 9,534   |   |                  | $ | 7,861   |  
|Short-term investments                                                                                                |  |               | 199     |   |                  |   | 1,598   |  
|Accounts receivable, net                                                                                              |  |               | 5,511   |   |                  |   | 5,299   |  
|Prepaid expenses                                                                                                      |  |               | 232     |   |                  |   | 255     |  
|Other current assets                                                                                                  |  |               | 201     |   |                  |   | 226     |  
|Current assets  discontinued operations                                                                              |  |               | 55      |   |                  |   | 1,632   |  
|                                                                                                                      |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                  |  |               | 15,732  |   |                  |   | 16,871  |  
|                                                                                                                      |  |              
|Noncurrent investments                                                                                                |  |               | 1,388   |   |                  |   |        |  
|Property and equipment, less accumulated depreciation and amortization of $4,793 in 2005 and $4,492 in 2004           |  |               | 17,782  |   |                  |   | 17,774  |  
|Leased property under capital leases, less accumulated depreciation and amortization of $250 in 2005 and $128 in 2004 |  |               | 5,549   |   |                  |   | 5,519   |  
|Other assets, net                                                                                                     |  |               | 61      |   |                  |   | 880     |  
|Noncurrent assets  discontinued operations                                                                           |  |               | 2,190   |   |                  |   | 2,496   |  
|                                                                                                                      |  |               |         |   |                  |   |         |  
|Total assets                                                                                                          |  | $             | 42,702  |   |                  | $ | 43,540  |  
|                                                                                                                      |  |               |         |   |                  |   |         |  
|Liabilities and Shareholders Equity                                                                                  |  |               |         |   |                  |   |         |  
|Current Liabilities:                                                                                                  |  |               |         |   |                  |   |         |  
|Current portion of obligations under capital leases                                                                   |  | $             | 1       |   |                  | $ | 1       |  
|Accounts payable                                                                                                      |  |               | 3,199   |   |                  |   | 3,797   |  
|Accrued payroll and other compensation                                                                                |  |               | 485     |   |                  |   | 457     |  
|Accrued income taxes                                                                                                  |  |               | 183     |   |                  |   | 183     |  
|Other accrued taxes                                                                                                   |  |               | 57      |   |                  |   | 210     |  
|Other liabilities and accrued expenses                                                                                |  |               | 1,749   |   |                  |   | 1,629   |  
|Current liabilities  discontinued operations                                                                         |  |               | 488     |   |                  |   | 749     |  
|                                                                                                                      |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                             |  |               | 6,162   |   |                  |   | 7,026   |  
|                                                                                                                      |  |              
|Obligations under capital leases                                                                                      |  |               | 234     |   |                  |   | 234     |  
|Other noncurrent liabilities                                                                                          |  |               | 15      |   |                  |   | 21      |  
|                                                                                                                      |  |              
|Shareholders Equity:                                                                                                 |  |               |         |   |                  |   |         |  
|Class A Common Stock, $.01 par value                                                                                  |  |               | 32      |   |                  |   | 32      |  
|Class B Common Stock, $.01 par value                                                                                  |  |               | 6       |   |                  |   | 6       |  
|Paid-in capital                                                                                                       |  |               | 58,096  |   |                  |   | 58,096  |  
|Accumulated deficit                                                                                                   |  |               | (21,836 | ) |                  |   | (21,873 | )
|Accumulated other comprehensive loss                                                                                  |  |               | (7      | ) |                  |   | (2      | )
|                                                                                                                      |  |               |         |   |                  |   |         |  
|Total shareholders equity                                                                                            |  |               | 36,291  |   |                  |   | 36,259  |  
|                                                                                                                      |  |               |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                            |  | $             | 42,702  |   |                  | $ | 43,540  |  
|                                                                                                                      |  |               |         |   |                  |   |         |  



See accompanying notes to condensed
consolidated financial statements.



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##### Table of Contents

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



|                                                                                            |  |                          |        |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                            |  | Six Months EndedJune 30, |       
|                                                                                            |  | 2005                     |        |   | 2004 |  
|Operating activities:                                                                       |  |                          |        |   |      |   |        |  
|Loss from continuing operations                                                             |  | $                        | (33    | ) |      | $ | (495   | )
|Reconciliation of loss from continuing operations to cash provided by operating activities: |  |                          |        |   |      |   |        |  
|Depreciation and amortization                                                               |  |                          | 489    |   |      |   | 398    |  
|Amortization of investments                                                                 |  |                          | (1     | ) |      |   | 5      |  
|(Benefit) provision for losses on accounts receivable                                       |  |                          | (115   | ) |      |   | 62     |  
|Loss from disposal of property and equipment                                                |  |                          |       |   |      |   | 1      |  
|Gain on sale of investments                                                                 |  |                          |       |   |      |   | (2     | )
|Change in operating assets and liabilities:                                                 |  |                          |        |   |      |   |        |  
|Accounts receivable                                                                         |  |                          | (277   | ) |      |   | (741   | )
|Prepaid expenses                                                                            |  |                          | 23     |   |      |   | 883    |  
|Other current assets                                                                        |  |                          | 25     |   |      |   | (56    | )
|Other assets                                                                                |  |                          |       |   |      |   | 17     |  
|Accounts payable                                                                            |  |                          | (598   | ) |      |   | (1,316 | )
|Accrued payroll and other compensation                                                      |  |                          | 28     |   |      |   | 114    |  
|Accrued income taxes                                                                        |  |                          |       |   |      |   | (17    | )
|Other accrued taxes                                                                         |  |                          | (153   | ) |      |   | (182   | )
|Other liabilities and accrued expenses                                                      |  |                          | 120    |   |      |   | 167    |  
|Other noncurrent liabilities                                                                |  |                          | (6     | ) |      |   |       |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Net cash used in operating activities from continuing operations                            |  |                          | (498   | ) |      |   | (1,162 | )
|Net cash provided by operating activities from discontinued operations                      |  |                          | 1,392  |   |      |   | 1,377  |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Net cash provided by operating activities                                                   |  |                          | 894    |   |      |   | 215    |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Investing activities:                                                                       |  |                          |        |   |      |   |        |  
|Purchases of available-for-sale investments                                                 |  |                          | (1,393 | ) |      |   |       |  
|Proceeds from the maturity/sale of available-for-sale investments                           |  |                          | 1,400  |   |      |   | 4,398  |  
|Capital expenditures                                                                        |  |                          | (530   | ) |      |   | (4,506 | )
|Proceeds from disposal of property and equipment                                            |  |                          | 3      |   |      |   | 79     |  
|Payments received on note for sale of facility                                              |  |                          | 1,000  |   |      |   |       |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Net cash provided by (used in) investing activities from continuing operations              |  |                          | 480    |   |      |   | (29    | )
|Net cash provided by investing activities from discontinued operations                      |  |                          | 299    |   |      |   | 806    |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Net cash provided by investing activities                                                   |  |                          | 779    |   |      |   | 777    |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Increase in cash and cash equivalents                                                       |  |                          | 1,673  |   |      |   | 992    |  
|Cash and cash equivalents at beginning of year                                              |  |                          | 7,861  |   |      |   | 3,224  |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                  |  | $                        | 9,534  |   |      | $ | 4,216  |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Significant non-cash investing and financing activities:                                    |  |                          |        |   |      |   |        |  
|Capital lease obligations incurred                                                          |  | $                        |       |   |      | $ | 238    |  



See accompanying notes to condensed
consolidated financial statements.



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##### Table of Contents

AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005



Note 1. Basis of Presentation



The unaudited condensed consolidated financial statements of Avalon Holdings Corporation and subsidiaries (collectively Avalon)
and related notes included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted consistent with such rules and regulations. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the
consolidated financial statements and related notes included in Avalons 2004 Annual Report to Shareholders.



In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position of Avalon as of June 30, 2005, and the results of its operations and cash flows for the interim periods presented.



The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year.



Note 2. Basic Net Income (Loss) Per Share



Basic net income (loss) per share has been computed using the weighted average number of
common shares outstanding each period, which was 3,803,331. There were no common equivalent shares outstanding and therefore diluted per share amounts are equal to basic per share amounts for the three and six months ended June 30, 2005 and 2004.



Note 3. Investment Securities



Avalon held available-for-sale securities of $1,587,000 and $1,598,000 at June 30, 2005 and
December 31, 2004, respectively. At June 30, 2005, $199,000 is included in the Condensed Consolidated Balance Sheets under the caption Short-term investments and $1,388,000 is included under the caption Noncurrent
investments. At December 31, 2004, $1,598,000 is included in the Condensed Consolidated Balance Sheets under the caption Short-term investments. As a result of the classification of these securities as available-for-sale, Avalon
recorded unrealized income, net of applicable income taxes, of $4,000 during the three month period ended June 30, 2005 and an unrealized loss of $5,000 during the six month period ended June 30, 2005, as a component of comprehensive loss. Avalon
recognized unrealized losses, net of applicable income taxes, of $17,000 and $10,000 during the three and six month periods ended June 30, 2004, respectively, as a component of comprehensive loss. Accumulated other comprehensive loss was $7,000 at
June 30, 2005.



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##### Table of Contents

Information regarding investment securities consists of the following (in thousands):



|                    |  |               |       |                       |   |    |                    |  |               |       |                       |   |       |                    |   |    |   |  |   |      
|------------------- |  | ------------- | ----- | --------------------- | - | -- | ------------------ |  | ------------- | ----- | --------------------- | - | ----- | ------------------ | - | -- | - |  | - | -----
|                    |  | June 30, 2005 |       | December 31, 2004    
|                    |  | AmortizedCost |       | GrossUnrealizedLosses |   |    | EstimatedFairValue |  | AmortizedCost |       | GrossUnrealizedLosses |   |       | EstimatedFairValue
|Available-for-Sale: |  |               |       |                       |   |    |                    |  |               |       |                       |   |       |                    |   |    |   |  |   |      
|U.S. Treasury Notes |  | $             | 1,594 |                       | $ | (7 | )                  |  | $             | 1,587 |                       | $ | 1,600 |                    | $ | (2 | ) |  | $ | 1,598



The amortized cost and estimated fair
value of available-for-sale investments at June 30, 2005, by contractual maturity, consists of the following (in thousands):



|                                      |  |                    |       |                     |   |      
|------------------------------------- |  | ------------------ | ----- | ------------------- | - | -----
|                                      |  | Available-for-Sale
|                                      |  | AmortizedCost      |       | EstimatedFair Value
|Due in one year or less               |  | $                  | 200   |                     | $ | 199  
|Due after one year through five years |  |                    | 1,394 |                     |   | 1,388
|                                      |  |                    |       |                     |   |      
|Total                                 |  | $                  | 1,594 |                     | $ | 1,587
|                                      |  |                    |       |                     |   |      



Note 4. Comprehensive Income (Loss)



Comprehensive income (loss) is comprised of two components: net income (loss)
and other comprehensive income (loss). Comprehensive income (loss) is the change in equity during a period from transactions and other events and circumstances from non-owner sources. The unrealized gains and losses, net of applicable taxes, related
to available-for-sale securities is the only component of Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets for Avalon. Comprehensive income (loss), net of related tax effects, is as follows (in
thousands):



|                                                        |  |                            |     |   |                          |   |        |      |  |   |      |   |  |   |        |  
|------------------------------------------------------- |  | -------------------------- | --- | - | ------------------------ | - | ------ | ---- |  | - | ---- | - |  | - | ------ | -
|                                                        |  | Three Months EndedJune 30, |     |   | Six Months EndedJune 30, |  
|                                                        |  | 2005                       |     |   | 2004                     |   |        | 2005 |  |   | 2004 |  
|Net (loss) income                                       |  | $                          | (75 | ) |                          | $ | (2,498 | )    |  | $ | 37   |   |  | $ | (3,523 | )
|Unrealized gain (loss) on available-for-sale securities |  |                            | 4   |   |                          |   | (17    | )    |  |   | (5   | ) |  |   | (10    | )
|                                                        |  |                            |     |   |                          |   |        |      |  |   |      |   |  |   |        |  
|Comprehensive (loss) income                             |  | $                          | (71 | ) |                          | $ | (2,515 | )    |  | $ | 32   |   |  | $ | (3,533 | )
|                                                        |  |                            |     |   |                          |   |        |      |  |   |      |   |  |   |        |  



Note 5. Discontinued Operations



Avalons environmental remediation operation had continued to experience
operating losses as a result of a decline in net operating revenues and operational inefficiencies. Recognizing that the continuing losses incurred by the environmental remediation business would adversely impact Avalons future financial
performance, in the fourth quarter of 2003, management determined that it was in Avalons best interest to sell or discontinue the operation of the environmental remediation business. In January 2004, Avalon sold all of the fixed assets of the
remediation business for $.2 million and recorded a gain of $.1 million on the sale. As part of the transaction, the purchaser assumed all of the remediation business obligations relating to ongoing projects. The remediation business retained
all of its other liabilities and assets, including cash and accounts receivable. The results of operations of the remediation business have been included in discontinued operations.



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##### Table of Contents

In the fourth quarter of 2001, the remediation business recorded a pretax charge of $2.2 million to the provision for
losses on accounts receivable as a result of IT Group Inc., and most of its subsidiaries, including IT Corporation (IT), having filed for protection under Chapter 11 of the United States Bankruptcy Code on January 16, 2002. The
remediation business had performed services as a subcontractor to IT for which it had not received payment. In the fourth quarter of 2002, the remediation business purchased from IT, for a nominal amount, the receivable relating to the contract
under which it had performed services. The remediation business subsequently filed for binding arbitration under the provisions of the contract for payment of such receivable. On October 25, 2004, as a result of such arbitration, the remediation
business was awarded, after offsets for counterclaims, the net amount of $1.4 million, plus interest of $.1 million for its claim. Such amount was recorded as income in discontinued operations in the third quarter of 2004. Such monies were received
in February 2005.



The financial results of Avalons technical
environmental engineering and consulting business had been at a level lower than expected. The business began to experience losses and Avalon believed that the losses were likely to continue in the future. Accordingly, in the fourth quarter of 2003,
management determined that it was in Avalons best interest to discontinue the operations of the engineering and consulting business. In January 2004, Avalon discontinued such operations and the results of operations have been included in
discontinued operations.



Concurrent with the decision to discontinue the
technical environmental engineering and consulting business, Avalon decided to sell the building associated with the technical environmental services operations. As a result, the building is classified as held-for-sale and the expenses related to
the maintenance and operation of the building have been included in discontinued operations. Based upon quoted market prices, in the second quarter of 2005, Avalon recorded a $.2 million write-down of the building. Such write-down is included in
discontinued operations.



On July 15, 2004, Avalon completed the sale of
DartAmericA, Inc. (DartAmericA) for a selling price of approximately $4.2 million. At the closing, BMC International, Inc. (BMC) delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable in 6
monthly installments of interest only and 54 equal monthly installments of $21,583 commencing February 15, 2005. The promissory note bears interest at a rate of 6.875%. The balance of the selling price, $.2 million, was based upon changes in certain
of DartAmericAs balance sheet items from March 31, 2004 to June 30, 2004 and was paid in September 2004. On June 30, 2005, BMC paid Avalon the remaining balance of the promissory note which amounted to approximately $.9 million. The results of
operations of the transportation operations have been included in discontinued operations.



Prior to the completion of the sale, DartAmericA transferred to Avalon, Dart Realty, Inc., a wholly owned subsidiary of DartAmericA, which owned the Canfield, Ohio terminal. In May 2005, Avalon sold this facility for
approximately $.3 million and recognized a gain on the sale of approximately $.2 million. Such gain is included in discontinued operations.



Note 6. Legal Matters



In the ordinary course of conducting its business, Avalon becomes involved in lawsuits, administrative proceedings and governmental investigations, including those related to environmental matters. Some of these
proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such lawsuits or other proceedings cannot be
predicted with certainty, Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from such pending proceedings, individually or in the aggregate, will have a material adverse effect on its financial position or
results of operations.



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Note 7. Business Segment Information



In applying Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related
Information, Avalon considered its operating and management structure and the types of information subject to regular review by its chief operating decision maker. On this basis, Avalons reportable segments include waste
management services and golf and related operations. Avalon accounts for intersegment net operating revenues as if the transactions were with third parties. The segment disclosures are presented on this basis for all periods presented.



Avalons primary business segment, the waste management services segment, provides
hazardous and nonhazardous waste disposal brokerage and management services to industrial, commercial, municipal and governmental customers and manages a captive landfill for an industrial customer. The golf and related operations segment includes
the operations of two golf courses, a travel agency and a clubhouse that provides dining and banquet facilities. Avalon does not have significant operations located outside the United States and, accordingly, geographical segment information is not
presented.



For both the six months ended June 30, 2005 and June 30, 2004, one
customer and its affiliates accounted for approximately 13% of the waste management services segments net operating revenues to external customers and approximately 11% of Avalons consolidated net operating revenues.



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The accounting policies of the segments are consistent with those described for the consolidated financial statements in
the summary of significant accounting policies. Avalon measures segment profit for internal reporting purposes as income (loss) from continuing operations before taxes. Business segment information including the reconciliation of segment income
(loss) to consolidated income (loss) from continuing operations before taxes is as follows (in thousands):



|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------------ |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                       |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                       |  | 2005                       |       |   | 2004                     |   |       | 2005 |  |   | 2004   |  
|Net operating revenues from:                           |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Waste management services:                             |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|External customers revenues                            |  | $                          | 7,193 |   |                          | $ | 5,957 |      |  | $ | 13,875 |   |  | $ | 11,672 |  
|Intersegment revenues                                  |  |                            |      |   |                          |   | 31    |      |  |   | 4      |   |  |   | 72     |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Total waste management services                        |  |                            | 7,193 |   |                          |   | 5,988 |      |  |   | 13,879 |   |  |   | 11,744 |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Golf and related operations:                           |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|External customers revenues                            |  |                            | 1,546 |   |                          |   | 1,305 |      |  |   | 2,294  |   |  |   | 1,829  |  
|Intersegment revenues                                  |  |                            | 15    |   |                          |   | 5     |      |  |   | 22     |   |  |   | 13     |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Total golf and related operations                      |  |                            | 1,561 |   |                          |   | 1,310 |      |  |   | 2,316  |   |  |   | 1,842  |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Segment operating revenues                             |  |                            | 8,754 |   |                          |   | 7,298 |      |  |   | 16,195 |   |  |   | 13,586 |  
|Intersegment eliminations                              |  |                            | (15   | ) |                          |   | (36   | )    |  |   | (26    | ) |  |   | (85    | )
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Total net operating revenues                           |  | $                          | 8,739 |   |                          | $ | 7,262 |      |  | $ | 16,169 |   |  | $ | 13,501 |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before taxes: |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Waste management services                              |  | $                          | 688   |   |                          | $ | 559   |      |  | $ | 1,490  |   |  | $ | 1,074  |  
|Golf and related operations                            |  |                            | (116  | ) |                          |   | 86    |      |  |   | (321   | ) |  |   | (23    | )
|Other business                                         |  |                            |      |   |                          |   | (1    | )    |  |   | (1     | ) |  |   | (2     | )
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Segment income before taxes                            |  |                            | 572   |   |                          |   | 644   |      |  |   | 1,168  |   |  |   | 1,049  |  
|                                                       |  |                            |       |  
|Corporate interest income                              |  |                            | 54    |   |                          |   | 13    |      |  |   | 94     |   |  |   | 33     |  
|Corporate other income, net                            |  |                            | 2     |   |                          |   | 1     |      |  |   | 23     |   |  |   | 14     |  
|General corporate expenses                             |  |                            | (693  | ) |                          |   | (742  | )    |  |   | (1,318 | ) |  |   | (1,591 | )
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Loss from continuing operations before taxes           |  | $                          | (65   | ) |                          | $ | (84   | )    |  | $ | (33    | ) |  | $ | (495   | )
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  





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Business Segment Information (continued)



|                            |  |                             |    |                          |   |      |  |      |     |  |   |   
|--------------------------- |  | --------------------------- | -- | ------------------------ | - | ---- |  | ---- | --- |  | - | --
|                            |  | Three Months Ended June 30, |    | Six Months EndedJune 30,
|                            |  | 2005                        |    | 2004                     |   | 2005 |  | 2004
|Interest income:            |  |                             |    |                          |   |      |  |      |     |  |   |   
|                            |  |                             |    |                         
|Waste management services   |  | $                           | 22 |                          | $ | 23   |  | $    | 43  |  | $ | 39
|Golf and related operations |  |                             | 2  |                          |   | 4    |  |      | 5   |  |   | 5 
|Corporate                   |  |                             | 54 |                          |   | 13   |  |      | 94  |  |   | 33
|                            |  |                             |    |                          |   |      |  |      |     |  |   |   
|Total                       |  | $                           | 78 |                          | $ | 40   |  | $    | 142 |  | $ | 77
|                            |  |                             |    |                          |   |      |  |      |     |  |   |   



|                                        |  |              |         |   |                  |   |         |  
|--------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                        |  | June 30,2005 |         |   | December 31,2004 |  
|Identifiable assets:                    |  |              |         |   |                  |   |         |  
|                                        |  |             
|Waste management services               |  | $            | 4,954   |   |                  | $ | 4,609   |  
|Golf and related operations             |  |              | 19,621  |   |                  |   | 19,574  |  
|Other businesses                        |  |              | 831     |   |                  |   | 731     |  
|Corporate                               |  |              | 32,829  |   |                  |   | 33,838  |  
|Discontinued operations                 |  |              | 2,245   |   |                  |   | 4,128   |  
|                                        |  |              |         |   |                  |   |         |  
|Subtotal                                |  |              | 60,480  |   |                  |   | 62,880  |  
|Elimination of intersegment receivables |  |              | (17,778 | ) |                  |   | (19,340 | )
|                                        |  |              |         |   |                  |   |         |  
|Total                                   |  | $            | 42,702  |   |                  | $ | 43,540  |  
|                                        |  |              |         |   |                  |   |         |  



Note 8. Recently Issued Financial
Accounting Standards



In December 2004, the FASB issued SFAS No. 123 (revised
2004), Share-Based Payment. This statement revises FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123
(revised 2004) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (revised 2004) requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The provisions for this statement are effective as of the first interim or annual reporting
period of the first fiscal year beginning on or after December 15, 2005. Although management is still reviewing the provisions of SFAS No. 123 (revised 2004), its preliminary assessment is that this statement will not have a material impact on
Avalons financial position or results of operations.



In May 2005, the
FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of AFB No. 20 and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 requires retrospective application to prior periods financial statements of a voluntary
change in accounting principle unless it is deemed impracticable. APB No. 20 Accounting Changes, previously required that voluntary changes in accounting principle be recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. The statement is effective as of January 1, 2006. Management does not believe that the adoption of SFAS No. 154 will have a material impact on Avalons consolidated financial
statements.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion provides information which management believes is relevant to an assessment and understanding of the operations and financial condition of
Avalon Holdings Corporation and its subsidiaries. As used in this report, the term Avalon means Avalon Holdings Corporation and its wholly owned subsidiaries, taken as a whole, unless the context indicates otherwise.



Statements included in Managements Discussion and Analysis of Financial Condition
and Results of Operations which are not historical in nature are intended to be, and are hereby identified as, forward looking statements. Avalon cautions readers that forward looking statements, including, without limitation, those
relating to Avalons future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements, due to risks and factors identified herein and from time to time in Avalons reports filed with the Securities and Exchange Commission.



Liquidity and Capital Resources



For the first six months of 2005, Avalon utilized existing cash and cash provided from
operations to fund capital expenditures and meet operating needs.



Avalons aggregate capital expenditures in 2005 are expected to be in the range of $.6 million to $.9 million. Such expenditures will principally relate to building improvements, the purchase of golf equipment and the development of
software for Avalons golf and restaurant operations. During the first six months of 2005, capital expenditures for Avalon totaled approximately $.5 million which was principally related to building improvements and the development of software
for Avalons golf and restaurant operations.



Avalon entered into a
long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease, which commenced November 1, 2003, has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term
options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess
of $150,000 will be carried forward and applied to future leasehold improvement obligations. Avalon has made $5.8 million of leasehold improvements as of June 30, 2005. Based upon the amount of leasehold improvements already made and leasehold
improvements anticipated to be made in the future, Avalon expects to exercise all of its renewal options.



Working capital was $9.6 million at June 30, 2005 compared with $9.8 million at December 31, 2004. The decrease is primarily due to changes in the maturity dates of available-for-sale investments which resulted in
$1.4 million being reclassified to noncurrent investments from short-term investments, partially offset by an increase in accounts receivable of the waste management services segment.



The decrease in accounts payable of $.6 million at June 30, 2005 compared with December 31, 2004 is primarily due to a decrease in accounts
payable of the waste brokerage and management services operations as a result of the timing of payments to disposal facilities and transporters in the ordinary course of business.



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In the fourth quarter of 2001, Avalons remediation business had recorded a pretax charge of $2.2 million to the
provision for losses on accounts receivable as a result of IT Group Inc., and most of its subsidiaries, including IT Corporation (IT), having filed for protection under Chapter 11 of the United States Bankruptcy Code on January 16, 2002.
The remediation business had performed services as a subcontractor to IT for which it had not received payment. In the fourth quarter of 2002, the remediation business purchased from IT, for a nominal amount, the receivable relating to the contract
under which it had performed services. The remediation business subsequently filed for binding arbitration under the provisions of the contract for payment of such receivable. On October 25, 2004, as a result of such arbitration, the remediation
business was awarded, after offsets for counterclaims, the net amount of $1.4 million, plus interest of $.1 million for its claim. Such monies were received in February 2005.



On July 15, 2004, Avalon completed the sale of DartAmericA, Inc. for a selling price of approximately $4.2 million. At the closing, BMC
International, Inc. (BMC) delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable in 6 monthly installments of interest only and 54 equal monthly installments of $21,583 commencing February 15, 2005.
The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericA, Inc.s balance sheet items from March 31, 2004 to June 30, 2004 and was paid in September 2004. On June 30, 2005, BMC paid Avalon the remaining
balance of the promissory note which amounted to approximately $.9 million, of which $.2 million was included in the Condensed Consolidated Balance Sheets under the caption Accounts receivable, net and $.7 million was included under the
caption Other assets, net.



In May 2005, Avalon sold, for
approximately $.3 million, the Canfield, Ohio terminal building and property that was transferred to Avalon prior to the completion of the sale of DartAmericA, Inc.



From time to time, Avalon enters into contracts which require surety bonds or other financial instruments to assure performance under the
terms thereof. Although Avalon has obtained such bonds or other financial instruments in the past, substantial changes in the bond market have limited Avalons ability to obtain surety bonds in the future. No assurance can be given that such
bonds will be available in the future or, if available, that the premiums and/or any collateral requirements for such bonds will be reasonable. The inability of Avalon to obtain surety bonds may adversely impact its future financial performance and
any significant collateral requirements may impact Avalons liquidity.



Management believes that anticipated cash provided from future operations, existing working capital, as well as Avalons ability to incur indebtedness, will be, for the foreseeable future, sufficient to meet operating requirements and
fund capital expenditure programs. Avalon does not currently have a credit facility.



Several private country clubs in the northeast Ohio area are experiencing economic difficulties. Avalon believes some of these clubs may represent an attractive investment opportunity and is giving consideration to the possibility of
acquiring one or more additional golf courses. While Avalon has not entered into any pending agreements for acquisitions, it may do so at any time and will continue to consider acquisitions that make economic sense. Such potential acquisitions



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could be financed by existing working capital, secured or unsecured debt, issuance of common stock, or issuance of a security with characteristics of both
debt and equity, any of which could impact liquidity in the future.



Results
of Operations



Overall performance



Net operating revenues in the second quarter of 2005 increased to $8.7 million compared with
$7.3 million in the prior years second quarter. The increase is primarily the result of higher net operating revenues of the waste management services segment and, to a lessor extent, an increase in the net operating revenues of the golf and
related operations segment. Costs of operations increased to $7.4 million in the second quarter of 2005 compared with $5.9 million in the prior year quarter. The increase is primarily the result of an increase in the costs of operations directly
associated with higher net operating revenues of the waste management services segment and the golf and related operations segment. Consolidated selling, general and administrative expenses increased slightly in the second quarter of 2005 compared
with the second quarter of 2004. Avalon incurred a loss from continuing operations of $.1 million or a loss of $.02 per share for both the second quarter of 2005 and 2004.



For the first six months of 2005, net operating revenues increased to $16.2 million compared with $13.5 million for the first six months of
2004. The increase is primarily the result of higher net operating revenues of the waste management services segment and, to a lessor extent, an increase in the net operating revenues of the golf and related operations segment. Costs of operations
were $13.6 million for the first six months of 2005 compared with $11.1 million for the first six months of 2004. The increase is primarily the result of an increase in the costs of operations directly associated with higher net operating revenues
of the waste management services segment and the golf and related operations segment. Consolidated selling, general and administrative expenses decreased to $2.8 million for the first six months of 2005 compared with $3.0 million for the first six
months of 2004. Such decrease was primarily the result of a decrease in employee costs in the first six months of 2005 compared with the first six months of 2004. Avalon incurred a loss from continuing operations of $33,000 or a loss of $.01 per
share for the first six months of 2005 compared with a loss from continuing operations of $.5 million or a loss of $.13 per share for the prior year period.



Performance in the Second Quarter of 2005 compared with the Second Quarter of 2004



Segment performance



Segment performance should be read in conjunction with Note 7 to the Condensed Consolidated Financial Statements.



Net operating revenues of the waste management services segment increased to $7.2 million in
the second quarter of 2005 compared with $6.0 million in the second quarter of the prior year. The increase in net operating revenues is primarily the result of an increase in the level of waste brokerage and management services provided. Net
operating revenues of the captive landfill management operations were flat in the second quarter of 2005 compared with the second quarter of the prior year. Income from continuing operations before taxes for the waste management services segment
increased to $.7 million in the second quarter of 2005 compared



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with $.6 million in the second quarter of the prior year, primarily as a result of an increase in the level of business of the waste brokerage and management
business. Income from continuing operations of the captive landfill operations decreased slightly in the second quarter of 2005 compared with the second quarter of the prior year.



Net operating revenues of the golf and related operations were $1.6 million in the second quarter of 2005 compared with $1.3 million in the
second quarter of the prior year. The increase in net operating revenues is primarily due to increased merchandise, food and beverage sales in the second quarter of 2005 compared with the second quarter of 2004. The golf and related operations
segment incurred a loss from continuing operations before taxes of $.1 million in the second quarter of 2005 compared with income from continuing operations before taxes of $.1 million in the second quarter of the prior year. The decrease is
primarily due to increased depreciation expense and increased employee and operating costs associated with operating the Squaw Creek facilities in which the dining and banquet facilities are located.



Interest income



Interest income was $78,000 in the second quarter of 2005 compared with $40,000 in the second quarter of 2004. The increase is primarily the
result of interest income earned on a promissory note issued to Avalon in connection with the sale of the transportation operations in July 2004.



General corporate expenses



General corporate expenses were $.7 million in both the second quarter of 2005 and 2004. Decreased employee costs in the second quarter of 2005 compared with the second
quarter of 2004 were offset by increases in other various general corporate expenses.



Net loss



Avalon incurred a net loss of $.1 million in the
second quarter of 2005 compared with a net loss of $2.5 million in the second quarter of the prior year. Avalons overall effective tax rate, including the effect of state income tax provisions, was 0% in the second quarter of 2005 and 2004.
The deferred tax benefit arising from the loss before income taxes in both the second quarter of 2005 and 2004 was offset by an increase in the valuation allowance. A valuation allowance is provided when it is more likely than not that deferred tax
assets relating to certain federal and state loss carryforwards will not be realized. The overall effective tax rate is different than statutory rates primarily due to a change in the valuation allowance.



Performance in the first six months of 2005 compared with the first six months of
2004



Segment performance



Segment performance should be read in conjunction with Note 7 to the Condensed Consolidated
Financial Statements.



Net operating revenues of the waste management services
segment increased to $13.9 million in the first six months of 2005 compared with $11.7 million in the first six months of the prior year. The increase in net operating revenues is primarily the result of an increase in the level of waste brokerage
and management services provided. Net operating revenues of the captive landfill management operations increased slightly in the first six months of 2005 compared with the first



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six months of 2004. Income before taxes for the waste management services segment increased to $1.5 million in the first six months of 2005 compared with
$1.1 million in the first six months of the prior year, primarily as a result of an increase in the level of the waste brokerage and management services business and a decrease in the provision for losses on accounts receivable. Income before taxes
of the captive landfill management operations decreased slightly in the first six months of 2005 compared with the first six months of 2004.



Net operating revenues of the golf and related operations segment were $2.3 million in the first six months of 2005 compared with $1.8 million in the first six months of
the prior year. The golf courses, which are located in Warren, Ohio and Vienna, Ohio, were unavailable for play during the first three months of 2005 and 2004 due to adverse weather conditions. The increase in net operating revenues is primarily due
to an increase in the average number of members during the first six months of 2005 compared with the first six months of 2004 and increased merchandise, food and beverage sales. The golf and related operations segment incurred a loss from
continuing operations before taxes of $.3 million in the first six months of 2005 compared with a loss from continuing operations before taxes of $23,000 in the first six months of the prior year. The increased loss from continuing operations before
taxes is primarily due to increased depreciation expense and increased employee and operating costs associated with operating the Squaw Creek facilities in which the dining and banquet facilities are located.



Interest income



Interest income was $142,000 in the first six months of 2005 compared with $77,000 in the first six months of 2004. The increase is
primarily the result of interest income earned on a promissory note issued to Avalon in connection with the sale of the transportation operations in July 2004.



General corporate expenses



General corporate expenses were $1.3 million in the first six months of 2005 compared with $1.6 million in the first six months of 2004. The decrease is primarily the
result of decreased employee costs.



Net income



Avalon recorded net income of $37,000 in the first six months of 2005 compared with a net
loss of $3.5 million in the first six months of the prior year. Avalons overall effective tax rate, including the effect of state income tax provisions, was 0% in both the first six months of 2005 and 2004. The income tax provision for the
first six months of 2005 and the deferred tax benefit arising from the loss before income taxes for the first six months of 2004 were offset by a change in the valuation allowance. A valuation allowance is provided when it is more likely than not
that deferred tax assets relating to certain federal and state loss carryforwards will not be realized. The overall effective tax rate differs from statutory rates primarily due to the change in the valuation allowance.



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Trends and Uncertainties



In the ordinary course of conducting its business, Avalon becomes involved in lawsuits, administrative proceedings and governmental investigations, including those
relating to environmental matters. Some of these proceedings may result in fines, penalties or judgments being assessed against Avalon which, from time to time, may have an impact on its business and financial condition. Although the outcome of such
lawsuits or other proceedings cannot be predicted with certainty, management assesses the probability of loss and accrues a liability as appropriate. Avalon does not believe that any uninsured ultimate liabilities, fines or penalties resulting from
such pending proceedings, individually or in the aggregate, will have a material adverse effect on its financial position or results of operations.



The Board of Directors of Avalon explored the possibility of delisting Avalons common stock by reducing the number of shareholders of record below 300, thereby
eliminating the requirements for compliance with the Sarbanes-Oxley Act. Avalon believes compliance with the requirements of the Sarbanes-Oxley Act will be very costly. However, as a result of the Securities and Exchange Commissions
(SEC) decision to extend the compliance deadline under Section 404 of The Act (SOX 404) by one year for small public companies and the ongoing review by the SEC of how to minimize the costly impact of SOX 404 on small
companies, the Board of Directors decided not to pursue delisting at this time, but intends to review the situation again as future developments warrant.



The federal government and numerous state and local governmental bodies are continuing to consider legislation or regulations to either restrict or impede the disposal
and/or transportation of waste. A portion of Avalons waste management services revenues is derived from the brokerage of the disposal and/or transportation of out-of-state waste. Any law or regulation restricting or impeding the transportation
of waste or the acceptance of out-of-state waste for disposal could have a negative effect on Avalon.



From time to time, Avalon enters into contracts that require surety bonds or other financial instruments to assure performance under the terms thereof. Although Avalon has obtained such bonds or other financial
instruments in the past, substantial changes in the bond market have significantly limited Avalons ability to obtain surety bonds. No assurance can be given that such bonds will be available in the future or, if available, that the premiums
and/or any collateral requirements for such bonds will be reasonable. The inability of Avalon to obtain surety bonds may adversely impact its future financial performance.



Avalons waste disposal brokerage and management operations obtain and retain customers by providing services and identifying
cost-efficient disposal options unique to a customers needs. Consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and has caused disposal pricing to increase.
Avalon does not believe that industry pricing changes alone will have a material effect upon its waste disposal brokerage and management operations. However, consolidation has had the effect of reducing the number of competitors offering disposal
alternatives which may adversely impact the future financial performance of Avalons waste disposal brokerage and management operations.



Avalons captive landfill management business is dependent upon a single customer as its sole source of revenue.



A significant portion of Avalons business is not subject to long-term contracts. In
light of current economic, regulatory and competitive conditions, there can be no assurance that



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Avalons current customers will continue to transact business with Avalon at historical levels. Failure by Avalon to retain its current customers or to
replace lost business could adversely impact the future financial performance of Avalon.



Economic challenges throughout the industries served by Avalon have resulted in payment defaults by customers. While Avalon continuously endeavors to limit customers credit risks, customer-specific financial downturns
are not controllable by management. Significant customer payment defaults would have a material adverse impact upon Avalons future financial performance.



The Avalon Golf and Country Club has two championship golf courses and a clubhouse at both the Avalon Lakes and Squaw Creek facilities. In addition, the Squaw Creek
facility has a swimming pool, tennis courts and dining and banquet facilities. The Avalon Golf and Country Club competes with many public courses and country clubs in the area. Although the golf courses will continue to be available to the general
public, the primary source of revenues will be derived from the members of the Avalon Golf and Country Club. Avalon believes that the combination of the Squaw Creek and Avalon Lakes facilities will result in a significant increase in the number of
members of the Avalon Golf and Country Club. Such increased membership, if attained, will result in increased net operating revenues; however, there can be no assurance as to when such increased membership will be attained. Failure by Avalon to
attain increased membership could adversely affect the future financial performance of Avalon. Although Avalon has had an increase in the number of members of the Avalon Golf and Country Club, as of June 30, 2005, Avalon has not attained its
membership goals.



Squaw Creek and Avalon Lakes currently hold liquor licenses
for their respective facilities. If, for some reason, either of these facilities were to lose their liquor license, the financial performance of the golf and related operations would be adversely affected.



Avalons golf courses are located in Warren, Ohio and Vienna, Ohio and are significantly
dependent upon weather conditions during the golf season. Additionally, Avalons other operations are somewhat seasonal in nature since a significant portion of those operations are primarily conducted in selected northeastern and midwestern
states. As a result, Avalons financial performance is adversely affected by adverse weather conditions.



Management is currently evaluating Avalons strategic direction for the future. While there is no specific transactions under negotiation or pending at this time, Avalon does not necessarily intend to limit
itself in the future to lines of business which it has historically conducted.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



Avalon does not have significant exposure to changing interest rates. A 10% change in interest rates would have an immaterial effect on Avalons income before taxes for the next fiscal year. Avalon currently has
no debt outstanding and invests primarily in U.S. Treasury notes, short-term money market funds and other short-term obligations. Avalon does not undertake any specific actions to cover its exposure to interest rate risk and Avalon is not a party to
any interest rate risk management transactions.



Avalon does not purchase or
hold any derivative financial instruments.



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Item 4. Controls and Procedures



Avalons
management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There
have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



Reference is made to Item 3. Legal Proceedings in Avalons Annual Report on Form 10-K for the year ended December 31, 2004 for a description of legal proceedings.



Item 2. Changes in Securities and Use of Proceeds



None



Item 3. Defaults upon Senior Securities



None



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



None



Item 5. Other Information



None



Item 6. Exhibits and Reports on Form 8-K



(a) Exhibits



Exhibit 31.1 Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.



Exhibit 31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.



(b) Reports on Form 8-K



On June 20, 2005, Avalon announced the scheduling of its Annual Meeting.



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SIGNATURE



Pursuant to the requirements 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.



|                      |  |                             |  |                                                                                                                              
|--------------------- |  | --------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|                      |  | AVALON HOLDINGS CORPORATION
|                      |  | (Registrant)               
|                      |  |                            
|Date: August 12, 2005 |  | By:                         |  | /s/ Frank Lamanna                                                                                                            
|                      |  |                             |  | Frank Lamanna, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer and Duly Authorized Officer)





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