##### 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 September 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



---



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 ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.):    Yes ̈No  x



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 November 4, 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 Nine Months Ended September 30, 2005 and 2004 (Unaudited) |  | 3                                                                                    
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Balance Sheets at September 30, 2005 (Unaudited) and December 31, 2004                               |  | 4                                                                                    
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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                                                               |  | 18  
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                                                            
|                              |  |                                                                                                                             | 
|                              |  | Item 1.                                                                                                                     |  | Legal Proceedings                                                                     |  | 19  
|                              |  |                                                                                                                             | 
|                              |  | Item 2.                                                                                                                     |  | Changes in Securities and Use of Proceeds                                             |  | 19  
|                              |  |                                                                                                                             | 
|                              |  | Item 3.                                                                                                                     |  | Defaults upon Senior Securities                                                       |  | 19  
|                              |  |                                                                                                                             | 
|                              |  | Item 4.                                                                                                                     |  | Submission of Matters to a Vote of Security Holders                                   |  | 19  
|                              |  |                                                                                                                             | 
|                              |  | Item 5.                                                                                                                     |  | Other Information                                                                     |  | 19  
|                              |  |                                                                                                                             | 
|                              |  | Item 6.                                                                                                                     |  | Exhibits and Reports on Form 8-K                                                      |  | 19  
|                              | 
|SIGNATURE                     |  | 20                                                                                                                         



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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 EndedSeptember 30, |       |   | Nine Months Ended September 30, |  
|                                                                  |  | 2005                            |       |   | 2004                            |   |       | 2005 |  |   | 2004   |  
|Net operating revenues                                            |  | $                               | 9,517 |   |                                 | $ | 8,448 |      |  | $ | 25,686 |   |  | $ | 21,949 |  
|                                                                  |  |                                 |       |  
|Costs and expenses:                                               |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Costs of operations                                               |  |                                 | 7,821 |   |                                 |   | 7,072 |      |  |   | 21,404 |   |  |   | 18,143 |  
|Selling, general and administrative expenses                      |  |                                 | 1,480 |   |                                 |   | 1,985 |      |  |   | 4,316  |   |  |   | 5,053  |  
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Operating income (loss) from continuing operations                |  |                                 | 216   |   |                                 |   | (609  | )    |  |   | (34    | ) |  |   | (1,247 | )
|                                                                  |  |                                 |       |  
|Other income (expense):                                           |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Interest expense                                                  |  |                                 | (3    | ) |                                 |   | (4    | )    |  |   | (10    | ) |  |   | (11    | )
|Interest income                                                   |  |                                 | 88    |   |                                 |   | 62    |      |  |   | 230    |   |  |   | 139    |  
|Other income, net                                                 |  |                                 | 55    |   |                                 |   | 88    |      |  |   | 137    |   |  |   | 161    |  
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income taxes      |  |                                 | 356   |   |                                 |   | (463  | )    |  |   | 323    |   |  |   | (958   | )
|Provision (benefit) for income taxes                              |  |                                 |      |   |                                 |   |      |      |  |   |       |   |  |   |       |  
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                          |  |                                 | 356   |   |                                 |   | (463  | )    |  |   | 323    |   |  |   | (958   | )
|                                                                  |  |                                 |       |  
|Discontinued operations:                                          |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|(Loss) income from discontinued operations before income taxes    |  |                                 | (336  | ) |                                 |   | 1,500 |      |  |   | (266   | ) |  |   | (1,528 | )
|Provision (benefit) for income taxes                              |  |                                 |      |   |                                 |   |      |      |  |   |       |   |  |   |       |  
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|(Loss) income from discontinued operations                        |  |                                 | (336  | ) |                                 |   | 1,500 |      |  |   | (266   | ) |  |   | (1,528 | )
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                 |  | $                               | 20    |   |                                 | $ | 1,037 |      |  | $ | 57     |   |  | $ | (2,486 | )
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Net income (loss) per share from continuing operations (Note 2)   |  | $                               | .09   |   |                                 | $ | (.12  | )    |  | $ | .08    |   |  | $ | (.25   | )
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Net (loss) income per share from discontinued operations (Note 2) |  | $                               | (.09  | ) |                                 | $ | .40   |      |  | $ | (.07   | ) |  | $ | (.40   | )
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|Net income (loss) per share (Note 2)                              |  | $                               |      |   |                                 | $ | .28   |      |  | $ | .01    |   |  | $ | (.65   | )
|                                                                  |  |                                 |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|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)



|                                                                                                                      |  |                   |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                      |  | September 30,2005 |         |   | December 31,2004 |  
|                                                                                                                      |  | (Unaudited)       |         |   |                  |  
|Assets:                                                                                                               |  |                   |         |   |                  |   |         |  
|Current Assets:                                                                                                       |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                             |  | $                 | 6,993   |   |                  | $ | 7,861   |  
|Short-term investments                                                                                                |  |                   | 4,400   |   |                  |   | 1,598   |  
|Accounts receivable, net                                                                                              |  |                   | 5,845   |   |                  |   | 5,299   |  
|Prepaid expenses                                                                                                      |  |                   | 364     |   |                  |   | 255     |  
|Other current assets                                                                                                  |  |                   | 169     |   |                  |   | 226     |  
|Current assets  discontinued operations                                                                              |  |                   | 26      |   |                  |   | 1,632   |  
|                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                                  |  |                   | 17,797  |   |                  |   | 16,871  |  
|                                                                                                                      |  |                  
|Property and equipment, less accumulated depreciation and amortization of $4,986 in 2005 and $4,492 in 2004           |  |                   | 17,680  |   |                  |   | 17,774  |  
|Leased property under capital leases, less accumulated depreciation and amortization of $314 in 2005 and $128 in 2004 |  |                   | 5,676   |   |                  |   | 5,519   |  
|Other assets, net                                                                                                     |  |                   | 61      |   |                  |   | 880     |  
|Noncurrent assets  discontinued operations                                                                           |  |                   | 1,887   |   |                  |   | 2,496   |  
|                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                          |  | $                 | 43,101  |   |                  | $ | 43,540  |  
|                                                                                                                      |  |                   |         |   |                  |   |         |  
|Liabilities and Shareholders Equity                                                                                  |  |                   |         |   |                  |   |         |  
|Current Liabilities:                                                                                                  |  |                   |         |   |                  |   |         |  
|Current portion of obligations under capital leases                                                                   |  | $                 | 1       |   |                  | $ | 1       |  
|Accounts payable                                                                                                      |  |                   | 3,521   |   |                  |   | 3,797   |  
|Accrued payroll and other compensation                                                                                |  |                   | 502     |   |                  |   | 457     |  
|Accrued income taxes                                                                                                  |  |                   | 183     |   |                  |   | 183     |  
|Other accrued taxes                                                                                                   |  |                   | 147     |   |                  |   | 210     |  
|Other liabilities and accrued expenses                                                                                |  |                   | 1,734   |   |                  |   | 1,629   |  
|Current liabilities  discontinued operations                                                                         |  |                   | 460     |   |                  |   | 749     |  
|                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                             |  |                   | 6,548   |   |                  |   | 7,026   |  
|                                                                                                                      |  |                  
|Obligations under capital leases                                                                                      |  |                   | 234     |   |                  |   | 234     |  
|Other noncurrent liabilities                                                                                          |  |                   | 12      |   |                  |   | 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                                                                                                   |  |                   | (21,816 | ) |                  |   | (21,873 | )
|Accumulated other comprehensive loss                                                                                  |  |                   | (11     | ) |                  |   | (2      | )
|                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total shareholders equity                                                                                            |  |                   | 36,307  |   |                  |   | 36,259  |  
|                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                            |  | $                 | 43,101  |   |                  | $ | 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)



|                                                                                                     |  |                                |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                                     |  | Nine Months EndedSeptember 30, |       
|                                                                                                     |  | 2005                           |        |   | 2004 |  
|Operating activities:                                                                                |  |                                |        |   |      |   |        |  
|Income (loss) from continuing operations                                                             |  | $                              | 323    |   |      | $ | (958   | )
|Reconciliation of income (loss) from continuing operations to cash provided by operating activities: |  |                                |        |   |      |   |        |  
|Depreciation and amortization                                                                        |  |                                | 736    |   |      |   | 643    |  
|Amortization of investments                                                                          |  |                                | (3     | ) |      |   | 7      |  
|(Benefit) provision for losses on accounts receivable                                                |  |                                | (113   | ) |      |   | 140    |  
|Gain from disposal of property and equipment                                                         |  |                                | (2     | ) |      |   |       |  
|Gain on sale of investments                                                                          |  |                                |       |   |      |   | (2     | )
|Change in operating assets and liabilities:                                                          |  |                                |        |   |      |   |        |  
|Accounts receivable                                                                                  |  |                                | (614   | ) |      |   | (2,196 | )
|Prepaid expenses                                                                                     |  |                                | (109   | ) |      |   | 1,106  |  
|Other current assets                                                                                 |  |                                | 57     |   |      |   | 28     |  
|Other assets                                                                                         |  |                                |       |   |      |   | (853   | )
|Accounts payable                                                                                     |  |                                | (276   | ) |      |   | (520   | )
|Accrued payroll and other compensation                                                               |  |                                | 45     |   |      |   | 188    |  
|Accrued income taxes                                                                                 |  |                                |       |   |      |   | (71    | )
|Other accrued taxes                                                                                  |  |                                | (63    | ) |      |   | (153   | )
|Other liabilities and accrued expenses                                                               |  |                                | 105    |   |      |   | 147    |  
|Other noncurrent liabilities                                                                         |  |                                | (9     | ) |      |   | 24     |  
|                                                                                                     |  |                                |        |   |      |   |        |  
|Net cash provided by (used in) operating activities from continuing operations                       |  |                                | 77     |   |      |   | (2,470 | )
|Net cash provided by operating activities from discontinued operations                               |  |                                | 1,361  |   |      |   | 2,193  |  
|                                                                                                     |  |                                |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                                  |  |                                | 1,438  |   |      |   | (277   | )
|                                                                                                     |  |                                |        |   |      |   |        |  
|Investing activities:                                                                                |  |                                |        |   |      |   |        |  
|Purchases of investment securities                                                                   |  |                                | (4,408 | ) |      |   |       |  
|Proceeds from the maturity/sale of investment securities                                             |  |                                | 1,600  |   |      |   | 4,398  |  
|Capital expenditures                                                                                 |  |                                | (801   | ) |      |   | (5,034 | )
|Proceeds from disposal of property and equipment                                                     |  |                                | 5      |   |      |   | 79     |  
|Proceeds from the sale of DartAmericA, Inc.                                                          |  |                                |       |   |      |   | 3,192  |  
|Payments received on note from the sale of DartAmericA, Inc.                                         |  |                                | 1,000  |   |      |   |       |  
|                                                                                                     |  |                                |        |   |      |   |        |  
|Net cash (used in) provided by investing activities from continuing operations                       |  |                                | (2,604 | ) |      |   | 2,635  |  
|Net cash provided by investing activities from discontinued operations                               |  |                                | 298    |   |      |   | 1,082  |  
|                                                                                                     |  |                                |        |   |      |   |        |  
|Net cash (used in) provided by investing activities                                                  |  |                                | (2,306 | ) |      |   | 3,717  |  
|                                                                                                     |  |                                |        |   |      |   |        |  
|(Decrease) increase in cash and cash equivalents                                                     |  |                                | (868   | ) |      |   | 3,440  |  
|Cash and cash equivalents at beginning of year                                                       |  |                                | 7,861  |   |      |   | 3,224  |  
|                                                                                                     |  |                                |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                           |  | $                              | 6,993  |   |      | $ | 6,664  |  
|                                                                                                     |  |                                |        |   |      |   |        |  
|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)

September 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 September 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 nine months ended September 30, 2005 and 2004.



Note 3. Investment Securities



Avalon held
available-for-sale securities of $4,400,000 and $1,598,000 at September 30, 2005 and December 31, 2004, respectively, and are 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 recognized unrealized losses, net of applicable income taxes, of $4,000 during the three month period ended September 30, 2005 and $9,000 during the nine month
period ended September 30, 2005, as a component of comprehensive loss. Avalon recognized unrealized income, net of applicable income taxes, of $2,000 during the three month period ended September 30, 2004, and recognized an unrealized loss
of $8,000, net of applicable taxes, during the nine month period ended September 30, 2004, as a component of comprehensive loss. Accumulated other comprehensive loss was $11,000 at September 30, 2005.



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##### Table of Contents

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



|                        |  |                    |       |                       |   |     |                    |  |               |       |                       |   |       |                    |   |    |   |  |   |      
|----------------------- |  | ------------------ | ----- | --------------------- | - | --- | ------------------ |  | ------------- | ----- | --------------------- | - | ----- | ------------------ | - | -- | - |  | - | -----
|                        |  | September 30, 2005 |       | December 31, 2004    
|                        |  | AmortizedCost      |       | GrossUnrealizedLosses |   |     | EstimatedFairValue |  | AmortizedCost |       | GrossUnrealizedLosses |   |       | EstimatedFairValue
|Available-for-Sale:     |  |                    |       |                       |   |     |                    |  |               |       |                       |   |       |                    |   |    |   |  |   |      
|Certificates of Deposit |  | $                  | 3,015 |                       | $ |    |                    |  | $             | 3,015 |                       | $ |      |                    | $ |   |   |  | $ |     
|U.S. Treasury Notes     |  |                    | 1,396 |                       |   | (11 | )                  |  |               | 1,385 |                       |   | 1,600 |                    |   | (2 | ) |  |   | 1,598
|                        |  |                    |       |                       |   |     |                    |  |               |       |                       |   |       |                    |   |    |   |  |   |      
|Total                   |  | $                  | 4,411 |                       | $ | (11 | )                  |  | $             | 4,400 |                       | $ | 1,600 |                    | $ | (2 | ) |  | $ | 1,598
|                        |  |                    |       |                       |   |     |                    |  |               |       |                       |   |       |                    |   |    |   |  |   |      



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



|                                      |  |                    |       |                     |   |      
|------------------------------------- |  | ------------------ | ----- | ------------------- | - | -----
|                                      |  | Available-for-Sale
|                                      |  | AmortizedCost      |       | EstimatedFair Value
|Due in one year or less               |  | $                  | 4,411 |                     | $ | 4,400
|Due after one year through five years |  |                    |      |                     |   |     
|                                      |  |                    |       |                     |   |      
|Total                                 |  | $                  | 4,411 |                     | $ | 4,400
|                                      |  |                    |       |                     |   |      



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 EndedSeptember 30, |    | Nine Months EndedSeptember 30, |     
|                                                        |  | 2005                            |    |                                | 2004 |   | 2005  |  |   | 2004 |  
|Net income (loss)                                       |  | $                               | 20 |                                |      | $ | 1,037 |  | $ | 57   |   |  | $ | (2,486 | )
|Unrealized (loss) gain on available-for-sale securities |  |                                 | (4 | )                              |      |   | 2     |  |   | (9   | ) |  |   | (8     | )
|                                                        |  |                                 |    |                                |      |   |       |  |   |      |   |  |   |        |  
|Comprehensive income (loss)                             |  | $                               | 16 |                                |      | $ | 1,039 |  | $ | 48   |   |  | $ | (2,494 | )
|                                                        |  |                                 |    |                                |      |   |       |  |   |      |   |  |   |        |  



Note
5. Discontinued Operations



Avalons environmental remediation business
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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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. In October
2005, Avalon reached an agreement in principal with a third party to sell the building for $2 million. Avalon expects the sale to be completed within 90 days of a signed agreement. As such, Avalon recorded an additional $.3 million write-down of the
building in the third quarter of 2005 to reflect the purchase price less the costs to sell the building. Such write-downs have been 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 $3.0 million in cash and a secured promissory note of $1.0 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 has been included in discontinued operations.



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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.



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. Revenue for the golf and related operations segment consists primarily of membership dues, merchandise, food and beverage sales. Revenue
related to membership dues are recognized proportionately over twelve months. The unrecognized or deferred revenue for both September 30, 2005 and December 31, 2004 was $1.1 million and is included in the Condensed Consolidated Balance
Sheets under the caption Other liabilities and accrued expenses. Avalon does not have significant operations located outside the United States and, accordingly, geographical segment information is not presented.



For the nine months ended September 30, 2005 and September 30, 2004, one customer
and its affiliates accounted for approximately 12% and 14%, respectively, of the waste management services segments net operating revenues to external customers and approximately 10% and 12%, respectively, 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 EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                                       |  | 2005                            |       |   | 2004                           |   |        | 2005 |  |   | 2004   |  
|Net operating revenues from:                           |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Waste management services:                             |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|External customers revenues                            |  | $                               | 7,601 |   |                                | $ | 6,755  |      |  | $ | 21,476 |   |  | $ | 18,427 |  
|Intersegment revenues                                  |  |                                 |      |   |                                |   | 66     |      |  |   | 4      |   |  |   | 138    |  
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total waste management services                        |  |                                 | 7,601 |   |                                |   | 6,821  |      |  |   | 21,480 |   |  |   | 18,565 |  
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Golf and related operations:                           |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|External customers revenues                            |  |                                 | 1,916 |   |                                |   | 1,693  |      |  |   | 4,210  |   |  |   | 3,522  |  
|Intersegment revenues                                  |  |                                 | 14    |   |                                |   | 17     |      |  |   | 36     |   |  |   | 30     |  
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total golf and related operations                      |  |                                 | 1,930 |   |                                |   | 1,710  |      |  |   | 4,246  |   |  |   | 3,552  |  
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Segment operating revenues                             |  |                                 | 9,531 |   |                                |   | 8,531  |      |  |   | 25,726 |   |  |   | 22,117 |  
|Intersegment eliminations                              |  |                                 | (14   | ) |                                |   | (83    | )    |  |   | (40    | ) |  |   | (168   | )
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total net operating revenues                           |  | $                               | 9,517 |   |                                | $ | 8,448  |      |  | $ | 25,686 |   |  | $ | 21,949 |  
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before taxes: |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Waste management services                              |  | $                               | 701   |   |                                | $ | 642    |      |  | $ | 2,191  |   |  | $ | 1,716  |  
|Golf and related operations                            |  |                                 | 166   |   |                                |   | 197    |      |  |   | (155   | ) |  |   | 174    |  
|Other business                                         |  |                                 | (1    | ) |                                |   |       |      |  |   | (2     | ) |  |   | (2     | )
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Segment income before taxes                            |  |                                 | 866   |   |                                |   | 839    |      |  |   | 2,034  |   |  |   | 1,888  |  
|                                                       |  |                                 |       |  
|Corporate interest income                              |  |                                 | 65    |   |                                |   | 25     |      |  |   | 159    |   |  |   | 58     |  
|Corporate other income, net                            |  |                                 | 13    |   |                                |   | (24    | )    |  |   | 36     |   |  |   | (10    | )
|General corporate expenses                             |  |                                 | (588  | ) |                                |   | (1,303 | )    |  |   | (1,906 | ) |  |   | (2,894 | )
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before taxes  |  | $                               | 356   |   |                                | $ | (463   | )    |  | $ | 323    |   |  | $ | (958   | )
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Interest income:                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Waste management services                              |  | $                               | 21    |   |                                | $ | 34     |      |  | $ | 64     |   |  | $ | 73     |  
|Golf and related operations                            |  |                                 | 2     |   |                                |   | 3      |      |  |   | 7      |   |  |   | 8      |  
|Corporate                                              |  |                                 | 65    |   |                                |   | 25     |      |  |   | 159    |   |  |   | 58     |  
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total                                                  |  | $                               | 88    |   |                                | $ | 62     |      |  | $ | 230    |   |  | $ | 139    |  
|                                                       |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  



|                                        |  |                   |         |   |                  |   |         |  
|--------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                        |  | September 30,2005 |         |   | December 31,2004 |  
|Identifiable assets:                    |  |                   |         |   |                  |   |         |  
|Waste management services               |  | $                 | 7,156   |   |                  | $ | 4,609   |  
|Golf and related operations             |  |                   | 20,025  |   |                  |   | 19,574  |  
|Other businesses                        |  |                   | 831     |   |                  |   | 731     |  
|Corporate                               |  |                   | 31,201  |   |                  |   | 33,838  |  
|Discontinued operations                 |  |                   | 1,913   |   |                  |   | 4,128   |  
|                                        |  |                   |         |   |                  |   |         |  
|Subtotal                                |  |                   | 61,126  |   |                  |   | 62,880  |  
|Elimination of intersegment receivables |  |                   | (18,025 | ) |                  |   | (19,340 | )
|                                        |  |                   |         |   |                  |   |         |  
|Total                                   |  | $                 | 43,101  |   |                  | $ | 43,540  |  
|                                        |  |                   |         |   |                  |   |         |  



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The increase in the identifiable assets of the waste management services segment of $2.5 million and the $2.6 million
decrease of corporate identifiable assets are principally related to intersegment transactions and are eliminated in consolidation.



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. Currently, Avalon has not entered into any share-based transactions for employee services and, as such, the adoption of SFAS No. 123 (revised 2004) will not have a material impact on Avalons financial position or
results of operations at this time.



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 nine 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 $.8 million to $1.0 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 nine months of 2005, capital expenditures for Avalon totaled approximately $.8 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 approximately $6 million of leasehold improvements as of September 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 $11.2 million at September 30, 2005 compared with $9.8 million at December 31, 2004. The increase is primarily the result of an increase in
short-term investments and an increase in accounts receivable relating to the waste brokerage and management services operations. The increase in short-term investments was primarily from the additional monies received in the first nine months of
2005 from an arbitration settlement, payments received on a promissory note and the sale of assets as described below.



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The increase in accounts receivable of $.5 million is primarily due to the increased net operating revenues of the waste
management services segment in the third quarter of 2005 compared with the fourth quarter of 2004.



The decrease in accounts payable of $.3 million at September 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.



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 $3.0 million in cash and a secured promissory note of $1.0 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, at the time of payment, $.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.



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 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.



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Results of Operations



Overall performance



Net operating revenues in the third quarter of 2005 increased to $9.5 million compared with $8.4 million in the prior years third 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 $7.8 million in the third quarter of 2005 compared with $7.1
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 decreased to $1.5 million in the third quarter of 2005 compared with $2 million in the third quarter of 2004. In the third quarter of 2004, consolidated selling, general and
administrative expenses included approximately $.5 million of nonrecurring bonuses. Avalon recorded income from continuing operations of $.4 million, or $.09 per share, in the third quarter of 2005 compared with a loss from continuing operations of
$.5 million, or a loss of $.12 per share, in the third quarter of 2004.



For
the first nine months of 2005, net operating revenues increased to $25.7 million compared with $21.9 million for the first nine 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 $21.4 million for the first nine months of 2005 compared with $18.1 million for the first nine 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 $4.3 million for the first nine months of 2005 compared with $5.1 million for the first nine months of 2004. Such decrease was primarily the result of a decrease in employee costs and a decrease in
bonuses in the first nine months of 2005 compared with the first nine months of 2004. Avalon recorded income from continuing operations of $.3 million, or $.08 per share, for the first nine months of 2005 compared with a loss from continuing
operations of $1 million, or a loss of $.25 per share, for the prior year period.



Performance in the Third Quarter of 2005 compared with the Third 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 $7.6 million in the third quarter of 2005 compared with $6.8 million in the third 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
third quarter of 2005 compared with the third quarter of the prior year. Income from continuing operations before taxes for the waste management services segment increased to $.7 million in the third quarter of 2005 compared with $.6 million



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in the third 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 were flat in the third quarter of 2005 compared with the third quarter of the prior year.



Net operating revenues of the golf and related operations were $1.9 million in the third quarter of 2005 compared with $1.7 million in the third quarter of the prior
year. The increase in net operating revenues is primarily due to increased merchandise, food and beverage sales in the third quarter of 2005 compared with the third quarter of 2004. The golf and related operations segment recorded income from
continuing operations before taxes of $.2 million in both the third quarter of 2005 and 2004. Although net operating revenues increased, depreciation expense, employee costs and operating costs associated with operating the Squaw Creek facilities in
which the dining and banquet facilities are located also increased.



Interest income



Interest income was $88,000 in the third
quarter of 2005 compared with $62,000 in the third quarter of 2004. The increase is primarily the result of additional interest income earned as a result of additional cash invested in short-term investments.



General corporate expenses



General corporate expenses were $.6 million in the third quarter of 2005 compared with $1.3
million in the third quarter of 2004. The decrease is primarily the result of decreased employee costs and bonuses. The third quarter of 2004 included approximately $.5 million of nonrecurring bonuses.



Net income



Avalon recorded net income of $20,000 in the third quarter of 2005 compared with net income of $1.0 million in the third quarter of the
prior year. Avalons overall effective tax rate, including the effect of state income tax provisions, was 0% in the third quarter of 2005 and 2004. The income tax provision in both the third quarter of 2005 and 2004 was 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 is different than
statutory rates primarily due to a change in the valuation allowance.



Performance in the first nine months of 2005 compared with the first nine 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 $21.5 million in the first nine months of 2005 compared with $18.6 million in the first nine
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 nine months of 2005 compared



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with the first nine months of 2004. Income before taxes for the waste management services segment increased to $2.2 million in the first nine months of 2005
compared with $1.7 million in the first nine months of the prior year, primarily as a result of an increase in the level of the waste brokerage and management services provided and a decrease in the provision for losses on accounts receivable.
Income before taxes of the captive landfill management operations increased slightly in the first nine months of 2005 compared with the first nine months of 2004.



Net operating revenues of the golf and related operations segment were $4.2 million in the first nine months of 2005 compared with $3.6
million in the first nine 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 nine months of 2005 compared with the first nine 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 $.2 million in the first nine months of 2005 compared with income from continuing operations before taxes of $.2 million in the first nine 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 $230,000 in the first nine months of 2005 compared with $139,000 in the
first nine months of 2004. The increase is primarily the result of interest income earned in the first six months of 2005 on a promissory note issued to Avalon in connection with the sale of the transportation operations in July 2004 and additional
interest income earned as a result of additional cash invested in short-term investments.



General corporate expenses



General
corporate expenses were $1.9 million in the first nine months of 2005 compared with $2.9 million in the first nine months of 2004. The decrease is primarily the result of decreased insurance expense, employee costs and bonuses in 2005 compared with
the first nine months of 2004. The first nine months of 2004 included approximately $.5 million of nonrecurring bonuses.



Net income



Avalon recorded net income of $57,000 in the first nine months of 2005 compared with a net loss of $2.5 million in the first nine 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 nine months of 2005 and 2004. The income tax provision for the first nine months of 2005 and the deferred tax benefit arising from the loss before income taxes for the first nine 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 has 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) 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 has 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.



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 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.



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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
September 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 Certificates of Deposit, 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.



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



Avalons Annual Meeting of Shareholders was held on September 14, 2005; however, no vote of security holders occurred with respect to any matters reportable under this Item 4.



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
| | --- | -------------------



None



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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: November 11, 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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