2004

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UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended June 30, 2004



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



For the transition period from
 to



Commission file number 1-14105



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AVALON HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)



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



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



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



The registrant had 3,185,240 shares of its Class A Common Stock and 618,091 shares of its
Class B Common Stock outstanding as of August 11, 2004.



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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES



INDEX



|                              |  |                                                                                                                       |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                       |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                                      
|                              |  |                                                                                                                      
|                              |  | Item 1.    Financial Statements                                                                                       |  |     
|                              |  |                                                                                                                      
|                              |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003 (Unaudited) |  | 3   
|                              |  |                                                                                                                      
|                              |  | Condensed Consolidated Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003                              |  | 4   
|                              |  |                                                                                                                      
|                              |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited)           |  | 5   
|                              |  |                                                                                                                      
|                              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                      |  | 6   
|                              |  |                                                                                                                      
|                              |  | Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 11  
|                              |  |                                                                                                                      
|                              |  | 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                                                                                                                   



2



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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 Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                       |  | 2004                        |        |   | 2003                      |   |       | 2004 |  |   | 2003   |  
|Net operating revenues                                 |  | $                           | 7,261  |   |                           | $ | 7,213 |      |  | $ | 13,501 |   |  | $ | 12,316 |  
|                                                       |  |                             |        |  
|Costs and expenses:                                    |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Costs of operations                                    |  |                             | 5,888  |   |                           |   | 5,843 |      |  |   | 11,130 |   |  |   | 10,262 |  
|Selling, general and administrative expenses           |  |                             | 1,545  |   |                           |   | 1,833 |      |  |   | 3,068  |   |  |   | 3,365  |  
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Operating loss from continuing operations              |  |                             | (172   | ) |                           |   | (463  | )    |  |   | (697   | ) |  |   | (1,311 | )
|                                                       |  |                             |        |  
|Other income:                                          |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Interest income                                        |  |                             | 39     |   |                           |   | 48    |      |  |   | 77     |   |  |   | 95     |  
|Other income, net                                      |  |                             | 29     |   |                           |   | 29    |      |  |   | 73     |   |  |   | 71     |  
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Loss from continuing operations before income taxes    |  |                             | (104   | ) |                           |   | (386  | )    |  |   | (547   | ) |  |   | (1,145 | )
|                                                       |  |                             |        |  
|Provision (benefit) for income taxes                   |  |                             |       |   |                           |   |      |      |  |   |       |   |  |   |       |  
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Loss from continuing operations                        |  |                             | (104   | ) |                           |   | (386  | )    |  |   | (547   | ) |  |   | (1,145 | )
|                                                       |  |                             |        |  
|Discontinued operations:                               |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Loss from discontinued operations before income taxes1 |  |                             | (2,413 | ) |                           |   | (1    | )    |  |   | (3,028 | ) |  |   | (221   | )
|Provision (benefit) for income taxes                   |  |                             |       |   |                           |   |      |      |  |   |       |   |  |   |       |  
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Loss from discontinued operations                      |  |                             | (2,413 | ) |                           |   | (1    | )    |  |   | (3,028 | ) |  |   | (221   | )
|                                                       |  |                             |        |  
|Net loss                                               |  | $                           | (2,517 | ) |                           | $ | (387  | )    |  | $ | (3,575 | ) |  | $ | (1,366 | )
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Net loss per share from continuing operations          |  | $                           | (.03   | ) |                           | $ | (.10  | )    |  | $ | (.14   | ) |  | $ | (.30   | )
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Net loss per share from discontinued operations        |  | $                           | (.63   | ) |                           | $ |      |      |  | $ | (.80   | ) |  | $ | (.06   | )
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Net loss per share (Note 3)                            |  | $                           | (.66   | ) |                           | $ | (.10  | )    |  | $ | (.94   | ) |  | $ | (.36   | )
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding (Note 3)           |  |                             | 3,803  |   |                           |   | 3,803 |      |  |   | 3,803  |   |  |   | 3,803  |  
|                                                       |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   |        |  

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|1 | Includes loss on write-down of costs in excess of fair market value of net assets of acquired businesses of $538 and loss on write-down of long-lived assets of
$2,319.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes
to condensed consolidated financial statements.



3



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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)



|                                                                                                              |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                              |  | June 30, 2004 |         |   | December 31,2003 |  
|                                                                                                              |  | (Unaudited)   |         |   |                  |  
|Assets                                                                                                        |  |               |         |   |                  |   |         |  
|Current assets:                                                                                               |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                     |  | $             | 4,216   |   |                  | $ | 3,224   |  
|Short-term investments                                                                                        |  |               | 1,399   |   |                  |   |        |  
|Accounts receivable, net                                                                                      |  |               | 4,299   |   |                  |   | 3,620   |  
|Prepaid expenses                                                                                              |  |               | 715     |   |                  |   | 1,598   |  
|Other current assets                                                                                          |  |               | 274     |   |                  |   | 218     |  
|Current assets  discontinued operations                                                                      |  |               | 7,255   |   |                  |   | 8,819   |  
|                                                                                                              |  |               |         |   |                  |   |         |  
|Total current assets                                                                                          |  |               | 18,158  |   |                  |   | 17,479  |  
|                                                                                                              |  |              
|Noncurrent investments                                                                                        |  |               | 199     |   |                  |   | 6,009   |  
|Properties and equipment, less accumulated depreciation and amortization of $4,120 in 2004 and$ 3,755 in 2003 |  |               | 18,039  |   |                  |   | 18,392  |  
|Other assets, net                                                                                             |  |               | 63      |   |                  |   | 80      |  
|Noncurrent prepaid rent                                                                                       |  |               | 4,646   |   |                  |   | 324     |  
|Noncurrent assets  discontinued operations                                                                   |  |               | 2,976   |   |                  |   | 6,770   |  
|                                                                                                              |  |               |         |   |                  |   |         |  
|Total assets                                                                                                  |  | $             | 44,081  |   |                  | $ | 49,054  |  
|                                                                                                              |  |               |         |   |                  |   |         |  
|Liabilities and Shareholders Equity                                                                          |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                          |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                              |  | $             | 2,719   |   |                  | $ | 4,035   |  
|Accrued payroll and other compensation                                                                        |  |               | 344     |   |                  |   | 230     |  
|Accrued income taxes                                                                                          |  |               | 225     |   |                  |   | 242     |  
|Other accrued taxes                                                                                           |  |               | 113     |   |                  |   | 295     |  
|Other liabilities and accrued expenses                                                                        |  |               | 1,607   |   |                  |   | 1,447   |  
|Current liabilities  discontinued operations                                                                 |  |               | 3,738   |   |                  |   | 3,885   |  
|                                                                                                              |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                     |  |               | 8,746   |   |                  |   | 10,134  |  
|                                                                                                              |  |              
|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                                                                                           |  |               | (22,793 | ) |                  |   | (19,218 | )
|Accumulated other comprehensive income (loss)                                                                 |  |               | (6      | ) |                  |   | 4       |  
|                                                                                                              |  |               |         |   |                  |   |         |  
|Total shareholders equity                                                                                    |  |               | 35,335  |   |                  |   | 38,920  |  
|                                                                                                              |  |               |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                    |  | $             | 44,081  |   |                  | $ | 49,054  |  
|                                                                                                              |  |               |         |   |                  |   |         |  



See
accompanying notes to condensed consolidated financial statements.



4



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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)

(in thousands)



|                                                                                            |  |                          |        |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                            |  | Six Months EndedJune 30, |       
|                                                                                            |  | 2004                     |        |   | 2003 |  
|Operating activities:                                                                       |  |                          |        |   |      |   |        |  
|Loss from continuing operations                                                             |  | $                        | (547   | ) |      | $ | (1,145 | )
|Reconciliation of loss from continuing operations to cash provided by operating activities: |  |                          |        |   |      |   |        |  
|Depreciation and amortization                                                               |  |                          | 383    |   |      |   | 406    |  
|Amortization of investments                                                                 |  |                          | 5      |   |      |   | 34     |  
|Provision for losses on accounts receivable                                                 |  |                          | 62     |   |      |   | 290    |  
|Gain from disposal of property and equipment                                                |  |                          | 1      |   |      |   | (1     | )
|Gain on sale of investments                                                                 |  |                          | (2     | ) |      |   |       |  
|Change in operating assets and liabilities:                                                 |  |                          |        |   |      |   |        |  
|Accounts receivable                                                                         |  |                          | (741   | ) |      |   | (871   | )
|Prepaid expenses                                                                            |  |                          | 883    |   |      |   | 865    |  
|Other current assets                                                                        |  |                          | (56    | ) |      |   | (78    | )
|Noncurrent prepaid rent                                                                     |  |                          | (4,322 | ) |      |   |       |  
|Other assets                                                                                |  |                          | 17     |   |      |   | 2      |  
|Accounts payable                                                                            |  |                          | (1,316 | ) |      |   | (118   | )
|Accrued payroll and other compensation                                                      |  |                          | 114    |   |      |   | 67     |  
|Accrued income taxes                                                                        |  |                          | (17    | ) |      |   | 52     |  
|Other accrued taxes                                                                         |  |                          | (182   | ) |      |   | (137   | )
|Other liabilities and accrued expenses                                                      |  |                          | 160    |   |      |   | 416    |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Net cash used in operating activities from continuing operations                            |  |                          | (5,558 | ) |      |   | (218   | )
|Net cash provided by operating activities from discontinued operations                      |  |                          | 1,377  |   |      |   | 792    |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Net cash (used in) provided by operating activities                                         |  |                          | (4,181 | ) |      |   | 574    |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Investing activities:                                                                       |  |                          |        |   |      |   |        |  
|Purchase of available-for-sale investments                                                  |  |                          |       |   |      |   | (2,014 | )
|Maturities of available-for-sale investments                                                |  |                          |       |   |      |   | 1,935  |  
|Sales of available-for-sale investments                                                     |  |                          | 4,398  |   |      |   |       |  
|Capital expenditures                                                                        |  |                          | (110   | ) |      |   | (61    | )
|Proceeds from disposal of property and equipment                                            |  |                          | 79     |   |      |   | 1      |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Net cash provided by (used in) investing activities from continuing operations              |  |                          | 4,367  |   |      |   | (139   | )
|Net cash provided by (used in) investing activities from discontinued operations            |  |                          | 806    |   |      |   | (48    | )
|                                                                                            |  |                          |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                                         |  |                          | 5,173  |   |      |   | (187   | )
|                                                                                            |  |                          |        |   |      |   |        |  
|Increase in cash and cash equivalents                                                       |  |                          | 992    |   |      |   | 387    |  
|Cash and cash equivalents at beginning of year                                              |  |                          | 3,224  |   |      |   | 1,190  |  
|                                                                                            |  |                          |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                  |  | $                        | 4,216  |   |      | $ | 1,577  |  
|                                                                                            |  |                          |        |   |      |   |        |  



See
accompanying notes to condensed consolidated financial statements.



5



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AVALON HOLDINGS CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2004



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 2003 Annual Report to Shareholders.



In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial position of Avalon as of June 30, 2004, 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.
Revenue Recognition for Golf Operations



With the addition of the Squaw Creek
Country Club facilities in November 2003, the Avalon Golf and Country Club will be open year round instead of just during the golf season. Membership in the Avalon Golf and Country Club entitles members to use both the Avalon Lakes golf course
facilities and the Squaw Creek Country Club facilities. As a result, net operating revenues associated with membership dues will be prorated monthly over the entire year beginning with the first quarter of 2004. Previously, net operating revenues
associated with membership were recognized during the months of May through October, which generally represented the golf season.



Note 3. 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 month and six month periods ended June 30, 2004 and 2003.



Note 4. Investment Securities



Avalon held available-for-sale securities of $1,598,000 and $6,009,000 at June 30, 2004 and December 31, 2003, respectively which are
included in the Condensed Consolidated Balance Sheets under the captions Short-term investments and Noncurrent investments. As a result of the classification of these securities as available-for-sale, Avalon has recognized
unrealized losses, net of applicable income taxes, of $17,000 and $10,000 during the three month and six month periods ended June 30, 2004, respectively, as a component of other comprehensive income (loss). For the three month and six month periods
ended June 30, 2003, Avalon recognized unrealized losses of $25,000 and $45,000, respectively, as a component of other comprehensive income (loss). Accumulated other comprehensive income (loss) consisted of a loss of $6,000 at June 30, 2004 and
income of $4,000 at December 31, 2003.



6



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



|                    |  |               |       |                       |   |    |                    |  |               |       |                      |   |                    |  |   |   |  |   |      
|------------------- |  | ------------- | ----- | --------------------- | - | -- | ------------------ |  | ------------- | ----- | -------------------- | - | ------------------ |  | - | - |  | - | -----
|                    |  | June 30, 2004 |       | December 31, 2003    
|                    |  | AmortizedCost |       | GrossUnrealizedLosses |   |    | EstimatedFairValue |  | AmortizedCost |       | GrossUnrealizedGains |   | EstimatedFairValue
|Available-for-Sale: |  |               |       |                       |   |    |                    |  |               |       |                      |   |                    |  |   |   |  |   |      
|U.S. Treasury Notes |  | $             | 1,604 |                       | $ | (6 | )                  |  | $             | 1,598 |                      | $ | 6,005              |  | $ | 4 |  | $ | 6,009



The amortized cost and
estimated fair value of available-for-sale investments at June 30, 2004, by contractual maturity, consist of the following (in thousands):



|                                      |  |                    |       |                     |   |      
|------------------------------------- |  | ------------------ | ----- | ------------------- | - | -----
|                                      |  | Available-for-Sale
|                                      |  | AmortizedCost      |       | EstimatedFair Value
|Due in one year or less               |  | $                  | 1,404 |                     | $ | 1,399
|Due after one year through five years |  |                    | 200   |                     |   | 199  
|                                      |  |                    |       |                     |   |      
|Total                                 |  | $                  | 1,604 |                     | $ | 1,598
|                                      |  |                    |       |                     |   |      



Note
5. 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 income (loss) in the Condensed Consolidated Balance Sheets for Avalon. Comprehensive income (loss), net of
related tax effects, is as follows (in thousands):



|                                                 |  |                            |        |   |                          |   |      |      |  |   |        |   |  |   |        |  
|------------------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                 |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                 |  | 2004                       |        |   | 2003                     |   |      | 2004 |  |   | 2003   |  
|Net loss                                         |  | $                          | (2,517 | ) |                          | $ | (387 | )    |  | $ | (3,575 | ) |  | $ | (1,366 | )
|Unrealized loss on available-for-sale securities |  |                            | (17    | ) |                          |   | (25  | )    |  |   | (10    | ) |  |   | (45    | )
|                                                 |  |                            |        |   |                          |   |      |      |  |   |        |   |  |   |        |  
|Total comprehensive loss                         |  | $                          | (2,534 | ) |                          | $ | (412 | )    |  | $ | (3,585 | ) |  | $ | (1,411 | )
|                                                 |  |                            |        |   |                          |   |      |      |  |   |        |   |  |   |        |  



Note
6. Prepaid Rent



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 and classified as prepaid rent. At June 30, 2004, the balance of prepaid rent is $4,796,000 of which $150,000 is included in the Condensed Consolidated Balance Sheets under the caption
Prepaid expenses, and $4,646,000 is included under the caption Noncurrent prepaid rent. At December 31, 2003 the balance of prepaid rent was $474,000 of which $150,000 was included in the Condensed Consolidated Balance Sheets
under the caption Prepaid expenses and $324,000 was included under the caption Noncurrent prepaid rent.



7



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Note 7. Discontinued Operations



As previously disclosed, Avalon had been evaluating the business and prospects of its
transportation operations in light of its financial performance over the past few years. Such evaluation included an examination of each type of transportation service provided and measures needed to increase the profitability of these services, as
well as the consideration of other strategic alternatives including, without limitation, the discontinuation of certain operations. In connection with the transportation of municipal solid waste, Avalons transportation operations provided
loading services at several municipal solid waste transfer stations. The profitability of such operations was dependent upon the volume of waste delivered to each transfer station. The volume of waste delivered to each transfer station was not
within Avalons control and had been less than anticipated. During the second quarter of 2004, Avalon ceased transportation operations at three Massachusetts municipal solid waste transfer stations. In conjunction with the cessation of
these transfer station operations, Avalon closed its Oxford, Massachusetts terminal. Also, during the second quarter Avalon sold approximately $.2 million of idle assets of the transportation operations and recognized a gain of approximately $.4
million.



In addition, on June 25, 2004, Avalon announced that it had reached
an agreement in principle to sell all of the common stock of DartAmericA, Inc. (DartAmericA), Avalons transportation operations, to BMC International, Inc. (BMC). Based upon the proposed selling price and in accordance
with Avalons asset impairment policy, Avalon recorded a write-down of costs in excess of fair market value of net assets of acquired businesses (goodwill) of approximately $.5 million and a write-down of the long-lived assets of
approximately $2.3 million. The results of operations of the transportation operations for the current and prior years, including the write-down of goodwill and long-lived assets, have been included in discontinued operations.



On July 15, 2004, Avalon completed the sale of DartAmericA for a selling price of
approximately $4.2 million. At the closing, BMC delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable over 60 months. 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. Such balance is payable within two (2) business days of agreement upon the Consolidated Balance Sheet of DartAmericA as of June 30, 2004 and calculation of the final
adjustment to the initial purchase price. By purchasing the common stock of DartAmericA, BMC also acquired DartAmericAs wholly owned subsidiaries including Dart Trucking Company, Inc. (Dart) and Dart Services, Inc. and assumed
Darts operating lease obligations of approximately $5 million. 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. Avalon
intends to sell this facility. As a result, this facility is classified as held-for-sale and the expenses related to the maintenance and operation of this facility are included in discontinued operations. In addition, DartAmericA transferred to
Avalon all of the accounts receivable outstanding for more than 60 days as of June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful accounts.



Avalons environmental remediation operations 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.



8



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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 are 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 are included in discontinued operations.



Note 8. Legal Matters



In the ordinary course of conducting its business, Avalon also 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, would have a material adverse effect on it.



Note 9. 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.



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



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



9



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



|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------------ |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                       |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                       |  | 2004                       |       |   | 2003                     |   |       | 2004 |  |   | 2003   |  
|Net operating revenues from:                           |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Waste management services:                             |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|External customers revenues                            |  | $                          | 5,957 |   |                          | $ | 6,329 |      |  | $ | 11,672 |   |  | $ | 11,319 |  
|Intersegment revenues                                  |  |                            | 31    |   |                          |   | 20    |      |  |   | 72     |   |  |   | 70     |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Total waste management services                        |  |                            | 5,988 |   |                          |   | 6,349 |      |  |   | 11,744 |   |  |   | 11,389 |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Golf and related operations:                           |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|External customers revenues                            |  |                            | 1,304 |   |                          |   | 884   |      |  |   | 1,829  |   |  |   | 997    |  
|Intersegment revenues                                  |  |                            | 6     |   |                          |   | 23    |      |  |   | 13     |   |  |   | 38     |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Total golf and related operations                      |  |                            | 1,310 |   |                          |   | 907   |      |  |   | 1,842  |   |  |   | 1,035  |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Segment operating revenues                             |  |                            | 7,298 |   |                          |   | 7,256 |      |  |   | 13,586 |   |  |   | 12,424 |  
|Intersegment eliminations                              |  |                            | (37   | ) |                          |   | (43   | )    |  |   | (85    | ) |  |   | (108   | )
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Total net operating revenues                           |  | $                          | 7,261 |   |                          | $ | 7,213 |      |  | $ | 13,501 |   |  | $ | 12,316 |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before taxes: |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Waste management services                              |  | $                          | 559   |   |                          | $ | 294   |      |  | $ | 1,074  |   |  | $ | 654    |  
|Golf and related operations                            |  |                            | 67    |   |                          |   | 164   |      |  |   | (75    | ) |  |   | (117   | )
|Other businesses                                       |  |                            | (1    | ) |                          |   | (3    | )    |  |   | (2     | ) |  |   | (5     | )
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Segment income before taxes                            |  |                            | 625   |   |                          |   | 455   |      |  |   | 997    |   |  |   | 532    |  
|                                                       |  |                            |       |  
|Corporate interest income                              |  |                            | 13    |   |                          |   | 44    |      |  |   | 33     |   |  |   | 89     |  
|Corporate other income, net                            |  |                            | 1     |   |                          |   | 9     |      |  |   | 14     |   |  |   | 22     |  
|General corporate expenses                             |  |                            | (743  | ) |                          |   | (894  | )    |  |   | (1,591 | ) |  |   | (1,788 | )
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Loss from continuing operations before taxes           |  | $                          | (104  | ) |                          | $ | (386  | )    |  | $ | (547   | ) |  | $ | (1,145 | )
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Interest income:                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Waste management services                              |  | $                          | 23    |   |                          | $ | 3     |      |  | $ | 39     |   |  | $ | 5      |  
|Golf and related operations                            |  |                            | 3     |   |                          |   | 1     |      |  |   | 5      |   |  |   | 1      |  
|Corporate                                              |  |                            | 13    |   |                          |   | 44    |      |  |   | 33     |   |  |   | 89     |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Total                                                  |  | $                          | 39    |   |                          | $ | 48    |      |  | $ | 77     |   |  | $ | 95     |  
|                                                       |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  



|                                        |  |              |         |   |                  |   |         |  
|--------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                        |  | June 30,2004 |         |   | December 31,2003 |  
|Identifiable assets:                    |  |              |         |   |                  |   |         |  
|Waste management services               |  | $            | 6,677   |   |                  | $ | 5,821   |  
|Golf and related operations             |  |              | 19,080  |   |                  |   | 14,825  |  
|Other businesses                        |  |              | 731     |   |                  |   | 557     |  
|Corporate                               |  |              | 24,218  |   |                  |   | 28,705  |  
|Discontinued operations                 |  |              | 10,231  |   |                  |   | 15,589  |  
|                                        |  |              |         |   |                  |   |         |  
|Sub Total                               |  |              | 60,937  |   |                  |   | 65,497  |  
|Elimination of intersegment receivables |  |              | (16,856 | ) |                  |   | (16,443 | )
|                                        |  |              |         |   |                  |   |         |  
|Total                                   |  | $            | 44,081  |   |                  | $ | 49,054  |  
|                                        |  |              |         |   |                  |   |         |  



10



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



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



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



Liquidity and Capital Resources



For the first six months of 2004, Avalon utilized existing cash and cash provided by the
sale of investment securities to fund capital expenditures and meet operating needs.



Avalons aggregate capital expenditures in 2004 are expected to be in the range of $.2 million to $.3 million, which relate principally to the purchase of golf equipment. During the first six months of 2004, capital expenditures for
Avalon totaled approximately $.1 million which was principally related to the development of software for the golf course operations and golf equipment.



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 and classified as prepaid rent. The construction of
certain leasehold improvements to the Squaw Creek facility are currently estimated to cost between $5 million and $5.5 million.



Working capital was $9.4 million at June 30, 2004 compared with $7.3 million at December 31, 2003. The increase is primarily the result of a reclassification of
noncurrent investments to short-term investments as a result of a change in maturity dates of certain investments and the increase in cash and cash equivalents resulting from the sale of investment securities.



The increase in accounts receivable is primarily due to the increased net operating revenues
of the waste management services in the second quarter of 2004 compared with the fourth quarter of 2003.



The increase in other noncurrent prepaid rent at June 30, 2004 compared with December 31, 2003 is a result of expenditures made by Avalon for leasehold improvements to the Squaw Creek facility in excess of $150,000
which will be carried forward and applied to future leasehold improvement obligations.



11



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The decrease in accounts payable at June 30, 2004 compared with December 31, 2003 is primarily due to the payment of
insurance premiums for Avalons insurance program.



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



Management believes that anticipated cash provided from future operations and 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 Warren, Ohio vicinity 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.



Results of Operations



Overall performance



Net operating
revenues in the second quarter of 2004 were $7.3 million compared with $7.2 million in the prior years second quarter. Costs of operations increased to $5.9 million in the second quarter of 2004 compared with $5.8 million in the prior year
quarter. Selling, general and administrative expenses decreased to $1.5 million in the second quarter of 2004 compared with $1.8 million in the prior year quarter. Avalon incurred a loss from continuing operations of $.1 million or a loss of $.03
per share for the second quarter of 2004 compared with a loss from continuing operations of $.4 million or a loss of $.10 per share for the second quarter of 2003. For the first six months of 2004, net operating revenues increased to $13.5 million
compared with $12.3 million for the first six months of 2003. Cost of operations were $11.1 million for the first six months of 2004 compared with $10.3 million for the first six months of the prior year. Selling, general and administrative expenses
decreased to $3.1 million for the first six months of 2004 compared with $3.4 million for the first six months of 2003. Avalon incurred a loss from continuing operations of $.5 million or a loss of $.14 per share for the first six months of 2004
compared with a loss from continuing operations of $1.1 million or a loss of $.30 per share for the first six months of 2003.



12



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Performance in the Second Quarter of 2004 compared with the Second Quarter of 2003



Segment performance



Segment performance should be read in conjunction with Note 9 to the Condensed Consolidated Financial Statements.



Net operating revenues of the waste management services segment decreased to $6 million in
the second quarter of 2004 compared with $6.3 million in the second quarter of the prior year. The decrease in net operating revenues is primarily the result of a decrease in the level of services provided by the waste brokerage and management
business and a slight decrease in the net operating revenues of the captive landfill management operation. Income before taxes for the waste management services segment was $.6 million in the second quarter of 2004 compared with $.3 million in the
second quarter of 2003. The income before taxes in the second quarter of 2003 included a charge of $.3 million to the provision for losses on accounts receivable due to a customer filing bankruptcy.



Avalons golf and related operations segment consists primarily of two golf courses, a
travel agency and a clubhouse that provides dining and banquet facilities. Although the golf courses will continue to be available to the general public, the primary source of revenue will arise from the members of the Avalon Golf and Country Club.
With the addition of the Squaw Creek Country Club facilities in November 2003, the Avalon Golf and Country Club will be open year round instead of just during the golf season. Membership in the Avalon Golf and Country Club entitles members to use
both the Avalon Lakes golf course facilities and the Squaw Creek Country Club facilities. As a result, net operating revenues associated with membership dues will be prorated monthly over the entire year beginning with the first quarter of 2004.
Previously, net operating revenues associated with membership dues were recognized during the months of May through October, which generally represented the golf season.



Net operating revenues of the golf and related operations segment were $1.3 million in the second quarter of 2004 compared with $.9 million
in the second quarter of 2003. The increase in net operating revenues is primarily attributed to a significant increase in the average number of members of the Avalon Golf and Country Club in the second quarter of 2004 compared with the prior year
quarter, which in turn has significantly increased the number of rounds of golf played and food and beverage sales. The golf and related operations segment recorded income before taxes of $.1 million in the second quarter of 2004 compared with a
income before taxes of $.2 million in the second quarter of 2003. The decrease in income before taxes is primarily due to incurring expenses at the Squaw Creek Country Club while the facilities were being renovated and constructed. The pro shop, bar
and lounge areas at the Squaw Creek Country Club were not fully operational until June 2004.



Avalon had been evaluating the business and prospects of its transportation operations in light of its financial performance over the past few years. Such evaluation included an examination of each type of
transportation service provided and measures needed to increase the profitability of these services, as well as the consideration of other strategic alternatives including, without limitation, the discontinuation of certain operations. In connection
with the transportation of municipal solid waste, Avalons transportation operations provided loading services at several municipal solid waste transfer stations. The profitability of such operations was dependent upon the volume of waste
delivered to each transfer station. The volume of waste delivered to each transfer station was not within Avalons control and had been less than anticipated. During the second quarter of 2004, Avalon ceased transportation operations at three
Massachusetts municipal solid waste transfer stations. In conjunction with the cessation of these transfer station operations, Avalon closed its Oxford, Massachusetts terminal. Also, during the second quarter, Avalon sold approximately $.2
million of idle assets of the transportation operations and recognized a gain of approximately $.4 million.



13



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In addition, on June 25, 2004, Avalon announced that it had reached an agreement in principle to sell all of the common
stock of DartAmericA, Inc. (DartAmericA), Avalons transportation operations, to BMC International, Inc. (BMC). Based upon the proposed selling price and in accordance with Avalons asset impairment policy, Avalon
recorded a write-down of costs in excess of fair market value of net assets of acquired businesses (goodwill) of approximately $.5 million and a write-down of the long-lived assets of approximately $2.3 million. The results of operations
of the transportation operations for the current and prior years, including the write-down of goodwill and long-lived assets, have been included in discontinued operations.



On July 15, 2004, Avalon completed the sale of DartAmericA for a selling price of approximately $4.2 million. At the closing, BMC delivered
to Avalon $3 million in cash and a secured promissory note of $1 million payable over 60 months. 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. Such balance is payable within two (2) business days of agreement upon the Consolidated Balance Sheet of DartAmericA as of June 30, 2004 and calculation of the final adjustment to the initial purchase price. Included with the purchase of
DartAmericA, BMC also acquired DartAmericAs wholly owned subsidiaries including Dart Trucking Company, Inc. (Dart) and Dart Services, Inc. and assumed Darts operating lease obligations of approximately $5 million. 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, Avalon intends to sell this facility. As a result, this facility is classified as
held-for-sale and the expenses related to the maintenance and operation of this facility are included in discontinued operations. In addition, DartAmericA transferred to Avalon all of the accounts receivable outstanding for more than 60 days as of
June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful account.



Interest income



Interest income was $39,000 in the second quarter of 2004 compared with $48,000 in the second quarter of 2003.



General corporate expenses



General corporate expenses were $.7 million in the second quarter of 2004 compared with $.9 million in the second quarter of 2003. The decrease is primarily a result of
decreased employee costs.



Net loss



Avalon recorded a net loss of $2.5 million in the second quarter of 2004 compared with a net
loss of $.4 million in the second quarter of the prior year. Avalons overall effective tax rate, including the effect of state income tax provisions, was 0% in both the second quarter of 2004 and 2003. The deferred tax benefit arising from the
loss before income taxes was offset by a 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 because of the increase in the valuation allowance.



14



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Performance in the first six months of 2004 compared with the first six months of 2003



Segment performance



Segment performance should be read in conjunction with Note 9 to the Condensed Consolidated Financial Statements.



Net operating revenues of the waste management services segment increased to $11.7 million in
the first six months of 2004 compared with $11.3 million in the first six months of the prior year. The increase in net operating revenues is primarily the result of an increase in the level of brokerage and management services provided. Income
before taxes for the waste management services segment increased to $1.1 million in the first six months of 2004 compared with $.7 million in the first six months of the prior year primarily as a result of an increase in the level of business. In
addition, the first six months of 2003 included a charge of $.3 million to the provision for losses on accounts receivable due to a customer filing bankruptcy.



Avalons golf and related operations segment consists primarily of two golf courses, a travel agency and a clubhouse that provides dining and banquet facilities.
Although the golf courses will continue to be available to the general public, the primary source of revenue will arise from the members of the Avalon Golf and Country Club. With the addition of the Squaw Creek Country Club facilities in November
2003, the Avalon Golf and Country Club will be open year round instead of just during the golf season. Membership in the Avalon Golf and Country Club entitles members to use both the Avalon Lakes golf course facilities and the Squaw Creek Country
Club facilities. As a result, net operating revenues associated with membership dues will be prorated monthly over the entire year beginning with the first quarter of 2004. Previously, net operating revenues associated with membership dues were
recognized during the months of May through October, which generally represented the golf season.



Net operating revenues of the golf and related operations segment were $1.8 million for the first six months of 2004 compared with $1.0 million for the first six months of 2003. The golf courses, which are located in
Warren, Ohio and Vienna, Ohio, were closed during the first three months of 2004 and 2003 due to seasonality. The golf and related operations segment incurred a loss before taxes of $75,000 in the first six months of 2004 compared with a loss before
taxes of $117,000 in the first six months of 2003. The increase in net operating revenues and decreased loss before taxes is primarily attributed to a significant increase in the average number of members of the Avalon Golf and Country Club in the
first six months of 2004 compared with the first six months of the prior year, which in turn has significantly increased the number of rounds of golf played and food and beverage sales.



Avalon had been evaluating the business and prospects of its transportation operations in light of its financial performance over the past
few years. Such evaluation included an examination of each type of transportation service provided and measures needed to increase the profitability of these services, as well as the consideration of other strategic alternatives including, without
limitation, the discontinuation of certain operations. In connection with the transportation of municipal solid waste, Avalons transportation operations provided loading services at several municipal solid waste transfer stations. The
profitability of such operations was dependent upon the volume of waste delivered to each transfer station. The volume of waste delivered to each transfer station was not within Avalons control and had been less than anticipated. During the
second quarter of 2004, Avalon ceased transportation operations at three Massachusetts municipal solid waste transfer stations. In conjunction with the cessation of these transfer station operations, Avalon closed its Oxford, Massachusetts
terminal. Also, during the second quarter, Avalon sold approximately $.2 million of idle assets of the transportation operations and recognized a gain of approximately $.4 million.



15



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In addition, on June 25, 2004, Avalon announced that it had reached an agreement in principle to sell all of the common
stock of DartAmericA, Inc. (DartAmericA), Avalons transportation operations, to BMC International, Inc. (BMC). Based upon the proposed selling price and in accordance with Avalons asset impairment policy, Avalon
recorded a write-down of costs in excess of fair market value of net assets of acquired businesses (goodwill) of approximately $.5 million and a write-down of the long-lived assets of approximately $2.3 million. The results of operations
of the transportation operations for the current and prior years, including the write-down of goodwill and long-lived assets, have been included in discontinued operations.



On July 15, 2004, Avalon completed the sale of DartAmericA for a selling price of approximately $4.2 million. At the closing, BMC delivered
to Avalon $3 million in cash and a secured promissory note of $1 million payable over 60 months. 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. Such balance is payable within two (2) business days of agreement upon the Consolidated Balance Sheet of DartAmericA as of June 2004 and calculation of the final adjustment to the initial purchase price. Included with the purchase of
DartAmericA, BMC also acquired DartAmericAs wholly owned subsidiaries including Dart Trucking Company, Inc. (Dart) and Dart Services, Inc. and assumed Darts operating lease obligations of approximately $5 million. 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, Avalon intends to sell this facility. As a result, this facility is classified as
held-for-sale and the expense related to the maintenance and operation of this facility are included in discontinued operations. In addition, DartAmericA transferred to Avalon all of the accounts receivable outstanding for more than 60 days as of
June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful account.



Interest income



Interest income was $.1 million in both the first six months of 2004 and 2003.



General corporate expenses



General
corporate expenses were $1.6 million in the first six months of 2004 compared with $1.8 million in the first six months of 2003. The decrease is primarily the result of decreased employee costs.



Net loss



Avalon recorded a net loss of $3.6 million in the first six months of 2004 compared with a net loss of $1.4 million in the first six months
of the prior year. Avalons overall effective tax rate, including the effect of state income tax provisions, was 0% in both the first six months of 2004 and 2003. The deferred tax benefit arising from the loss before income taxes was offset by
a 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 because of the increase in the valuation allowance.



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



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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 it.



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 significant
portion of Avalons waste management revenues are derived from the disposal 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 significant negative effect on Avalon.



Insurance costs have risen
dramatically over the past year. The increase in insurance premiums has increased Avalons operating expenses, which, in light of competitive market conditions, Avalon has not been able to fully pass on to its customers.



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



Competitive and economic pressures
continue to impact the financial performance of Avalons waste disposal brokerage and management services. Some of Avalons competitors periodically reduce their pricing to gain or retain business, especially during difficult economic
times, which may limit Avalons ability to maintain rates. A decline in the rates which customers are willing to pay could adversely impact the future financial performance of Avalon.



Avalons waste disposal brokerage 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.



Current economic challenges throughout the industries served by Avalon have resulted in a reduction of revenues coupled with an increase in payment defaults by customers. While Avalon continuously endeavors to limit
customer credit risks, customer specific financial downturns are not controllable by management. Significant customer payment defaults in the future will continue to have a material adverse impact upon Avalons future financial performance.



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As a result of the acquisition of rights to the Squaw Creek Country Club facilities, the Avalon Lakes Golf Club has
become the Avalon Golf and Country Club. In addition to a second championship golf course, the Squaw Creek facility includes a swimming pool, tennis courts and a clubhouse that provides 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.



Avalons golf courses are located in Warren, Ohio and Vienna, Ohio and are significantly
dependent upon weather conditions during the golf season. Additionally, all of 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.



Avalon believes that the current depressed state of the golf market may result in attractive golf course properties becoming available under favorable terms. In addition
to the Squaw Creek transaction previously described, it is possible that Avalon will further expand its involvement in the golf business in the future.



Management is currently evaluating Avalons strategic direction for the future. While there are 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.



Market Risk



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



Avalon does not purchase or
hold any derivative financial instruments.



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, 2003 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 April 29, 2004; 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 10.4 Stock Purchase Agreement dated as of June 30, 2004 between Avalon Holdings Corporation and BMC, International, Inc. for the purchase of DartAmericA, Inc.
|    | 
|    |  | Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.                                                                                 
|    | 
|    |  | Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.                                                                                 
|    | 
|    |  | Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.                                  
|    | 
|    |  | Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.                                  
|    | 
|(b) |  | Reports on Form 8-K                                                                                                                                                   
|    | 
|    |  | On June 25, 2004, Avalon announced an agreement to sell its transportation operations.                                                                                
|    | 
|    |  | On July 15, 2004, Avalon disclosed the completion of the sale of its transportation operations.                                                                       



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SIGNATURE



Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





|                      |  |                                                                                                                                   |  | 
|--------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | 
|                      |  | AVALON HOLDINGS CORPORATION                                                                                                      
|                      |  | (Registrant)                                                                                                                     
|                      | 
|Date: August 13, 2004 |  | By: /s/ Timothy C. Coxson                                                                                                        
|                      |  | Timothy C. Coxson, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Officer)



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