Exhibit 13.1

LOGO



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Financial Highlights (in thousands, except for per share amounts)  For the year

2008

2007Net operating revenues

$
48,978

$
45,432Income from continuing operations


738


1,345Income from discontinued operations





113Net income


738


1,458Income per share from continuing operations


.19


.35Income per share from discontinued operations





.03Net income per share


.19


.38At year-end

2008

2007Working capital

$
5,001

$
5,261Total assets


48,713


47,849Shareholders equity


40,174


39,436   The Company Avalon Holdings Corporation provides
waste management services to industrial, commercial, municipal and governmental customers in selected northeastern and midwestern U.S. markets. Avalon Holdings Corporation also owns the Avalon Golf and Country Club, which operates golf courses and
related facilities.


Contents  Financial Highlights

1Managements Discussion and Analysis of Financial Condition and Results of Operations

2Consolidated Balance Sheets

8Consolidated Statements of Operations

9Consolidated Statements of Cash Flows

10Consolidated Statements of Shareholders Equity

11Notes to Consolidated Financial Statements

12Report of Independent Registered Public Accounting Firm

19Managements Report on Internal Controls over Financial Reporting

20Company Location Directory

21Directors and Officers

22Shareholder Information

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Avalon Holdings Corporation and Subsidiaries



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 (collectively
Avalon). This discussion should be read in conjunction with the consolidated financial statements and accompanying notes.

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 year 2008, Avalon utilized cash provided by operations and existing cash to fund capital expenditures and meet operating needs.

Avalons aggregate capital expenditures in 2008 were $2.5 million. Such expenditures related principally to the construction costs of renovating and building additional banquet and recreational facilities for the golf and related
operations. Avalons aggregate capital expenditures in 2009 are expected to be in the range of $.2 million to $.5 million, which will principally relate to the equipment purchases and building improvements for the golf and related operations.

On November 1, 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related
facilities. The lease 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 $7.3
million of leasehold improvements as of December 31, 2008. 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 $5.0 million at December 31, 2008 compared with $5.3 million at December 31, 2007. The decrease is primarily due to
utilizing cash for the construction and renovation of the Avalon Golf and Country Club facilities, partially offset by an increase in accounts receivable.

The increase in accounts receivable of $1.6 million is primarily the result of significantly higher net operating revenues of the waste management segment in the fourth quarter of 2008 compared with the fourth quarter of 2007.

The increase in other current assets of $.3 million is primarily due to additional inventories of the golf segment as a result of opening the pro shop, the
restaurants and banquet facilities at the newly renovated Sharon facility in March 2008.

The decrease in accounts payable of $.2 million at
December 31, 2008 compared with December 31, 2007 is primarily due to the timing of payments to vendors in the ordinary course of business.

The
increase in other liabilities and accrued expenses of $.2 million at both December 31, 2008 and 2007 compared with their respective prior years is primarily the result of an increase in unrecognized or deferred revenue from the increase in
membership dues of the golf and related operations segment. Revenues related to membership dues are recognized proportionately over twelve months.



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On March 21, 2008, Avalon entered into a $3.5 million unsecured line of credit agreement with The Huntington
National Bank. Interest on borrowings accrues at LIBOR plus 1.75%. The line of credit contains certain financial and other covenants, customary representations, warranties and events of defaults. Avalon was in compliance with the debt covenants at
December 31, 2008 and expects to meet the covenants throughout 2009. At December 31, 2008, there were no borrowings under the line of credit.

Management believes that anticipated cash provided from future operations and existing working capital, as well as Avalons ability to borrow money under its credit facility, will be, for the foreseeable future, sufficient to meet
operating requirements and fund capital expenditure programs.

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, utilizing its line of credit, 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

Avalons primary business segment, the waste management services segment, provides hazardous and nonhazardous
waste brokerage and management services and captive landfill management services. The golf and related operations segment includes the operation of golf courses and related facilities and a travel agency.

Performance in 2008 compared with 2007

Overall Performance

Net operating revenues increased to $49.0 million in 2008 compared with $45.4 million in 2007. The increase is primarily the result of higher net
operating revenues of the golf and related operations segment and to a lesser extent, increased net operating revenues of the waste management services segment. Costs of operations increased to $41.5 million in 2008 compared with $38.2 million in
2007. The increase in costs of operations is primarily the result of increased expenses of the golf and related operations segment as a result of the Sharon facility becoming fully operational in March 2008. In addition, transportation and disposal
costs of the waste management services segment, increased due to the higher net operating revenues. Such costs vary directly with net operating revenues. Consolidated selling, general and administrative expenses increased to $7.0 million in 2008
compared with $6.3 million in 2007. The increase is primarily the result of increased employee expenses of the waste management services segment. Avalon recorded income from continuing operations of $.7 million in 2008 compared with income from
continuing operations of $1.3 million in 2007.

Segment Performance. Segment performance should be read in conjunction with Note 12 to the
Consolidated Financial Statements.

Net operating revenues of the waste management services segment increased to $39.4 million in 2008 compared with $38.1
million in 2007. Net operating revenues of the waste brokerage and management services increased to $36.9 million in 2008 from $35.6 million in 2007. The net operating revenues of the captive landfill management operations were $2.5 million in both
2008 and 2007. The increase in net operating revenues of the waste brokerage and management services was primarily due to a $1.1 million increase in event work and an increase of $.2 million in continuous or ongoing work in 2008 compared with the
prior year. Event work is defined as bid projects under a contract that occur on a one-time basis over a short period of time. Such work can fluctuate significantly from year to year. Due to the state of the economy, many customers that generate
continuous waste are curtailing their operations. As a result, less waste is being generated, which, in turn, could negatively impact the financial results of the waste brokerage and management services business.



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Income from continuing operations before taxes of the waste management services segment was $3.6 million in 2008 and
compared with $3.7 million in 2007. The decrease is primarily due to higher operating expenses of the captive landfill operations in 2008 which had income from continuing operations before taxes of $.6 million in 2008 and $.7 million in 2007. Even
though net operating revenues of the waste brokerage and management services increased and gross profit margins increased to 19.2% in 2008 from 18.6% in 2007, income from continuing operations before taxes was $3.0 million in both 2008 and 2007. In
comparing the year 2008 with 2007, the waste brokerage and management services business incurred higher employee costs, increased selling expenses and an increase in its provision for doubtful accounts.

Net operating revenues of the golf and related operations segment were $9.6 million in 2008 compared with $7.4 million in 2007. The golf courses, which are located in
northeast Ohio and western Pennsylvania, were unavailable for play during the first three months of 2008 and 2007 due to adverse weather conditions. The dining and banquet facilities at the Avalon Country Club at Sharon were opened in March 2008.
These facilities were closed for construction and renovation in 2007. Although the golf courses continue to be available to the general public, the primary source of revenues arises from members of the Avalon Golf and Country Club. During 2008, the
average number of members was 2,589 compared with 2,036 in 2007. The increase in net operating revenues is primarily due to the increase in membership dues as a result of a higher average number of members during 2008 compared with 2007 and
increased food and beverage sales as a result of the Sharon facility being open for ten months in 2008. The ability to attract and retain members is very important to the success of the golf and related operations segment. Avalon is continually
using different marketing strategies to attract new members, such as local television advertising and various membership promotions. However, due to the state of the economy, retaining members and attracting new members is becoming more difficult. A
significant decline in members could adversely impact the financial results of the golf and related operations segment.

The golf and related operations
segment incurred a loss from continuing operations before taxes of $.4 million in 2008 compared with a loss from continuing operations before taxes of $.3 million in 2007. The Sharon facility incurred significantly higher expenses in the first two
months of 2008 while the facility was being prepared for opening compared with the first two months of 2007 when the facility was closed. In addition, the year 2007 includes a one-time settlement of an employment contract dispute. Excluding the
aforementioned expenses and despite higher net operating revenues, income form continuing operations before taxes declined slightly in 2008 compared with 2007 primarily because of higher operating costs and increased depreciation expense of the
Avalon Country Club at Sharon. Additionally, although net operating revenues from green fees and cart rentals were slightly higher in 2008 compared with the prior year, the overall average play per golf course declined when considering the fact that
Avalon had three golf courses available for play in 2008 compared with only two courses for most of 2007. As a result, costs associated with operating the golf courses were higher as a percentage of net operating revenues in 2008 compared with 2007.

Interest Income

Interest income was $49,000
in 2008 compared with $435,000 in 2007. The decrease is primarily the result of a decrease in the average amount of cash invested during 2008 compared with 2007.

General Corporate Expenses

General corporate expenses were $2.5 million in 2008 compared with $2.3 million in 2007. The increase is
primarily due to increased accounting expenses and employee costs.

Net Income

Avalon recorded net income of $.7 million in 2008 compared with net income of $1.5 million in 2007. Excluding the minor effect of state income tax provisions, Avalons overall effective tax rate was 0% for 2008
and 2007. The overall effective tax rate is different than statutory rates primarily due to a change in the valuation allowance. Avalons income tax provision on income from continuing operations before income taxes was offset by a decrease in
the valuation allowance due to the use of its net operating losses. A valuation allowance has been provided when



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it is more likely than not that the deferred tax assets relating to certain federal and state loss carryforwards will not be realized. Avalon continues to
maintain a valuation allowance against the majority of its deferred tax amounts until it is evident that the deferred tax asset will be utilized in the future.

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 (the Act). Avalon believes compliance with the requirements of the Act could be very costly. 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 brokerage and management services revenues is derived from 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.

A significant portion of Avalons business is generated from waste brokerage and management services provided to customers and 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.

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 may cause disposal pricing to increase. Avalons waste brokerage and management operations may not be able to pass these price increases onto its customers, which, in turn, may adversely impact
Avalons future financial performance.

Avalons captive landfill management business is dependent upon a single customer as its sole source of
revenue. If the captive landfill management business is unable to retain this customer, Avalons future financial performance could be adversely impacted.

Economic challenges throughout the industries served by Avalon have resulted 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 would have a material adverse impact upon Avalons future financial performance.

The Avalon Golf
and Country Club has golf courses and clubhouses at each of its three facilities. The Squaw Creek and Sharon facilities each have a swimming pool, a fitness center and dining and banquet facilities. The Squaw Creek facility also has tennis courts.
During the first quarter of 2008, Avalon opened the dining and banquet facilities and fitness center at the Sharon club. The Avalon Golf and Country Club competes with many public courses and country clubs in the area. Although the golf courses
continue to be available to the general public, the primary source of revenues is derived from the members of the Avalon Golf and Country Club. Avalon believes that the combination of these three facilities will result in additional memberships in
the Avalon Golf and Country



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Club. Although there has been a continual increase in the number of members of the Avalon Golf and Country Club each year, as of December 31, 2008,
Avalon has not attained its membership goals. There can be no assurance as to when such increased membership will be attained and when the golf and related operations will ultimately become profitable. Due to the state of the economy, the ability to
retain current members and attract new members is becoming more difficult. Avalon is continually using different marketing strategies to attract new members, such as local television advertising and various membership promotions. A significant
decline in members could adversely affect the future financial performance of Avalon.

All three of Avalons clubhouse/golf course operations
currently hold liquor licenses for their respective facilities. If, for some reason, any one of these facilities were to lose its liquor license, the financial performance of the golf and related operations would be adversely affected.

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

Inflation Impact

Avalon has not entered into any long-term fixed price contracts that could have a material adverse impact upon its financial performance in periods of inflation. In general, management believes that rising costs
resulting from inflation could be passed on to customers; however, Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles requires management to make judgments, assumptions, and estimates that affect reported amounts. Significant accounting policies used in the preparation of Avalons Consolidated Financial Statements are
described in Note 2 to the consolidated financial statements. Estimates are used when accounting for, among other things, the allowance for doubtful accounts, asset impairments, contingencies and administrative proceedings, environmental matters and
taxes.

The majority of Avalons accounts receivable are due from industrial and commercial customers. Credit is extended based on an evaluation of a
customers financial condition and, generally, collateral is not required. Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms
are considered past due. Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, Avalons previous accounts receivable loss history, the customers current
ability to pay its obligation to Avalon and the condition of the general economy and the industry as a whole. Bankruptcy or economic challenges of a particular customer represent uncertainties that are not controllable by management. If
managements assessments change due to different assumptions or if actual collections differ from managements estimates, future operating results could be impacted. Avalon writes off accounts receivable when they become uncollectible.
Payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.

Certain events or changes in circumstances may indicate that the recoverability of the carrying value of long-lived assets should be assessed. Such events or changes may include a significant decrease in market value, a significant change
in the business climate in a particular market, or a current-period operating or cash flow loss combined with historical losses or projected future losses. If an event occurs or changes in circumstances are present, Avalon estimates the future cash
flows expected to result from the use of the applicable groups of long-lived assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value, Avalon
would recognize an impairment loss to the extent the carrying value of the groups of long-lived assets exceeds their fair value. Avalon would determine the fair value by using quoted market prices, if available, for such assets; or if quoted market
prices are not available, Avalon would discount the expected estimated future cash flows.



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The ability to accurately predict future cash flows may impact the determination of fair value. Avalons
assessments of cash flows represent managements best estimate at the time of the impairment review. Avalon estimates the future cash flows expected to result from the use and, if applicable, the eventual disposition of the assets. The key
variables that management must estimate include, among other factors, sales, costs, inflation and capital spending. Significant management judgment is involved in estimating these variables, and they include inherent uncertainties.

If different cash flows had been estimated in the current period, the value of the long-lived assets could have been materially impacted. Furthermore, Avalons
accounting estimates may change from period to period as conditions in markets change, and this could materially impact financial results in future periods.

When Avalon concludes that it is probable that an environmental liability has been incurred, a provision is made in Avalons financial statements for Avalons best estimate of the liability based on managements judgment and
experience, information available from regulatory agencies, and the number, financial resources and relative degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of that site, as well
as, the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no amount within the range appears to be a better estimate than any other, then Avalon provides for the minimum amount within the range, in
accordance with generally accepted accounting principles. The liability is recognized on an undiscounted basis. Avalons estimates are revised, as deemed necessary, as additional information becomes known. Such revisions may impact future
operating results. Although Avalon is not currently aware of any environmental liability, there can be no assurance that in the future an environmental liability will not occur.

Avalon recognizes deferred tax assets and liabilities based on differences between financial statement carrying amounts and the tax bases of assets and liabilities. Avalon also records tax benefits when it believes
that it is more likely than not that the benefit will be sustained by the tax authority. Avalon regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon historical taxable income, projected future
taxable income and the expected timing of the reversals of existing temporary differences to reduce its deferred assets to the amount that it believes is more likely than not to be realized. Avalon has considered future taxable income in assessing
the need for the valuation allowance. The $1,634,000 of deferred tax liabilities will reverse in the same period and jurisdiction and is of the same character as the temporary differences giving rise to the $1,659,000 of deferred tax assets. Avalon
has not provided a valuation allowance on the amount of deferred tax assets that it estimates will be utilized as a result of these reviews. The net deferred tax asset of $25,000 as of December 31, 2008 is likely to be realized as it relates to
an alternative minimum tax credit carryforward of $20,000, for which there is no expiration period and $5,000 of deferred tax assets which will be utilized upon the filing of certain state tax returns. If future taxable income is less than the
amount that has been assumed in assessing the recoverability of the deferred tax assets, then an increase in the valuation allowance will be required, with a corresponding increase to income tax expense. Likewise, should Avalon ascertain in the
future that it is more likely than not that deferred tax assets will be realized in excess of the net deferred tax assets, all or a portion of the $3,958,000 valuation allowance as of December 31, 2008, of which $2,851,000 relates to a capital
loss carryforward, would be reversed as a benefit to the provision for income taxes in the period such determination was made.



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Consolidated Balance Sheets

(in thousands, except for share data)



|                                                                                                                                                                           |  |              |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                           |  | December 31, |        
|                                                                                                                                                                           |  |              |         |  
|                                                                                                                                                                           |  | 2008         |         |   | 2007 |  
|                                                                                                                                                                           |  |              |         |  
|Assets                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Current Assets:                                                                                                                                                            |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                  |  | $            | 3,061   |   |      | $ | 5,086   |  
|Accounts receivable, less allowance for doubtful accounts of $369 in 2008 and $266 in 2007                                                                                 |  |              | 9,304   |   |      |   | 7,704   |  
|Prepaid expenses                                                                                                                                                           |  |              | 309     |   |      |   | 287     |  
|Other current assets                                                                                                                                                       |  |              | 636     |   |      |   | 366     |  
|                                                                                                                                                                           |  |              |         |  
|Total current assets                                                                                                                                                       |  |              | 13,310  |   |      |   | 13,443  |  
|                                                                                                                                                                           |  |             
|Property and equipment, net (Note 5)                                                                                                                                       |  |              | 29,437  |   |      |   | 28,568  |  
|Leased property under capital leases, net (Notes 3 and 5)                                                                                                                  |  |              | 5,882   |   |      |   | 5,759   |  
|Noncurrent deferred tax asset (Note 6)                                                                                                                                     |  |              | 25      |   |      |   | 19      |  
|Other assets, net                                                                                                                                                          |  |              | 59      |   |      |   | 60      |  
|                                                                                                                                                                           |  |              |         |  
|Total assets                                                                                                                                                               |  | $            | 48,713  |   |      | $ | 47,849  |  
|                                                                                                                                                                           |  |              |         |  
|                                                                                                                                                                           |  |             
|Liabilities and Shareholders Equity                                                                                                                                       |  |              |         |   |      |   |         |  
|Current Liabilities:                                                                                                                                                       |  |              |         |   |      |   |         |  
|Current portion of obligations under capital leases (Notes 3 and 11)                                                                                                       |  | $            | 1       |   |      | $ | 1       |  
|Accounts payable                                                                                                                                                           |  |              | 4,831   |   |      |   | 5,013   |  
|Accrued payroll and other compensation                                                                                                                                     |  |              | 711     |   |      |   | 594     |  
|Accrued income taxes                                                                                                                                                       |  |              | 19      |   |      |   | 43      |  
|Other accrued taxes                                                                                                                                                        |  |              | 281     |   |      |   | 260     |  
|Other liabilities and accrued expenses (Notes 2 and 7)                                                                                                                     |  |              | 2,466   |   |      |   | 2,271   |  
|                                                                                                                                                                           |  |              |         |  
|Total current liabilities                                                                                                                                                  |  |              | 8,309   |   |      |   | 8,182   |  
|                                                                                                                                                                           |  |             
|Obligations under capital leases (Notes 3 and 11)                                                                                                                          |  |              | 230     |   |      |   | 231     |  
|Contingencies and commitments (Notes 10 and 11)                                                                                                                            |  |              |        |   |      |   |        |  
|                                                                                                                                                                           |  |             
|Shareholders Equity (Note 9):                                                                                                                                             |  |              |         |   |      |   |         |  
|Class A Common Stock, $.01 par value, one vote per share; authorized 10,500,000 shares; issued and outstanding 3,190,786 shares at
December 31, 2008 and December 31, 2007 |  |              | 32      |   |      |   | 32      |  
|Class B Common Stock, $.01 par value, ten votes per share; authorized 1,000,000 shares; issued and outstanding 612,545 shares at
December 31, 2008 and December 31, 2007   |  |              | 6       |   |      |   | 6       |  
|Paid-in capital                                                                                                                                                            |  |              | 58,096  |   |      |   | 58,096  |  
|Accumulated deficit                                                                                                                                                        |  |              | (17,960 | ) |      |   | (18,698 | )
|                                                                                                                                                                           |  |              |         |  
|                                                                                                                                                                           |  |             
|Total shareholders equity                                                                                                                                                 |  |              | 40,174  |   |      |   | 39,436  |  
|                                                                                                                                                                           |  |              |         |  
|                                                                                                                                                                           |  |             
|Total liabilities and shareholders equity                                                                                                                                 |  | $            | 48,713  |   |      | $ | 47,849  |  
|                                                                                                                                                                           |  |              |         |  

See accompanying notes to consolidated financial statements.



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Consolidated Statements of Operations

(in thousands, except for per share amounts)



|                                                        |  |                         |        |   |      |   |        |  
|------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                                        |  | Year Ended December 31, |       
|                                                        |  |                         |        |  
|                                                        |  | 2008                    |        |   | 2007 |  
|                                                        |  |                         |        |  
|Net operating revenues                                  |  | $                       | 48,978 |   |      | $ | 45,432 |  
|                                                        |  |                        
|Costs and expenses:                                     |  |                         |        |   |      |   |        |  
|Costs of operations                                     |  |                         | 41,494 |   |      |   | 38,238 |  
|Selling, general and administrative expenses            |  |                         | 6,958  |   |      |   | 6,348  |  
|                                                        |  |                         |        |  
|Operating income from continuing operations             |  |                         | 526    |   |      |   | 846    |  
|                                                        |  |                        
|Other income:                                           |  |                         |        |   |      |   |        |  
|Interest expense                                        |  |                         | (14    | ) |      |   | (16    | )
|Interest income                                         |  |                         | 49     |   |      |   | 435    |  
|Other income, net                                       |  |                         | 213    |   |      |   | 120    |  
|                                                        |  |                         |        |  
|Income from continuing operations before income taxes   |  |                         | 774    |   |      |   | 1,385  |  
|Provision for income taxes (Note 6)                     |  |                         | 36     |   |      |   | 40     |  
|                                                        |  |                         |        |  
|Income from continuing operations                       |  |                         | 738    |   |      |   | 1,345  |  
|                                                        |  |                        
|Discontinued Operations (Note 4):                       |  |                         |        |   |      |   |        |  
|Income from discontinued operations before income taxes |  |                         |       |   |      |   | 113    |  
|Benefit for income taxes                                |  |                         |       |   |      |   |       |  
|                                                        |  |                         |        |  
|Income from discontinued operations                     |  |                         |       |   |      |   | 113    |  
|                                                        |  |                         |        |  
|                                                        |  |                        
|Net income                                              |  | $                       | 738    |   |      | $ | 1,458  |  
|                                                        |  |                         |        |  
|                                                        |  |                        
|Income per share from continuing operations (Note 2)    |  | $                       | .19    |   |      | $ | .35    |  
|                                                        |  |                         |        |  
|Income per share from discontinued operations (Note 2)  |  | $                       |       |   |      | $ | .03    |  
|                                                        |  |                         |        |  
|Net income per share (Note 2)                           |  | $                       | .19    |   |      | $ | .38    |  
|                                                        |  |                         |        |  
|Weighted average shares outstanding (Note 2)            |  |                         | 3,803  |   |      |   | 3,803  |  
|                                                        |  |                         |        |  

See accompanying notes to consolidated financial statements.



9



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Avalon Holdings Corporation and Subsidiaries





Consolidated Statements of Cash Flows

(in thousands)



|                                                                                                        |  |                         |        |   |      |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | -
|                                                                                                        |  | Year Ended December 31, |       
|                                                                                                        |  |                         |        |  
|                                                                                                        |  | 2008                    |        |   | 2007 |  
|                                                                                                        |  |                         |        |  
|Operating activities:                                                                                   |  |                         |        |   |      |   |         |  
|Income from continuing operations                                                                       |  | $                       | 738    |   |      | $ | 1,345   |  
|Reconciliation of income from continuing operations to cash provided by (used in) operating activities: |  |                         |        |   |      |   |         |  
|Depreciation                                                                                            |  |                         | 1,545  |   |      |   | 1,098   |  
|Amortization                                                                                            |  |                         | 1      |   |      |   | 1       |  
|Provision (benefit) for losses on accounts receivable                                                   |  |                         | 116    |   |      |   | (58     | )
|Benefit for deferred taxes                                                                              |  |                         | (6     | ) |      |   | (19     | )
|Gain from disposal of property and equipment                                                            |  |                         | (2     | ) |      |   | (1      | )
|Change in operating assets and liabilities:                                                             |  |                         |        |   |      |   |         |  
|Accounts receivable                                                                                     |  |                         | (1,716 | ) |      |   | 26      |  
|Prepaid expenses                                                                                        |  |                         | (22    | ) |      |   | (64     | )
|Other current assets                                                                                    |  |                         | (270   | ) |      |   | (142    | )
|Other assets                                                                                            |  |                         |       |   |      |   | 8       |  
|Accounts payable                                                                                        |  |                         | (182   | ) |      |   | 46      |  
|Accrued payroll and other compensation                                                                  |  |                         | 117    |   |      |   | 33      |  
|Accrued income taxes                                                                                    |  |                         | (24    | ) |      |   | 19      |  
|Other accrued taxes                                                                                     |  |                         | 21     |   |      |   | 8       |  
|Other liabilities and accrued expenses                                                                  |  |                         | 195    |   |      |   | 215     |  
|Other noncurrent liabilities                                                                            |  |                         |       |   |      |   |        |  
|                                                                                                        |  |                         |        |  
|Net cash provided by operating activities from continuing operations                                    |  |                         | 511    |   |      |   | 2,515   |  
|Net cash provided by operating activities from discontinued operations                                  |  |                         |       |   |      |   | 113     |  
|                                                                                                        |  |                         |        |  
|Net cash provided by operating activities                                                               |  |                         | 511    |   |      |   | 2,628   |  
|                                                                                                        |  |                         |        |  
|Investing activities:                                                                                   |  |                         |        |   |      |   |         |  
|Capital expenditures                                                                                    |  |                         | (2,541 | ) |      |   | (10,783 | )
|Proceeds from disposal of property and equipment                                                        |  |                         | 6      |   |      |   | 1       |  
|                                                                                                        |  |                         |        |  
|Net cash used in investing activities from continuing operations                                        |  |                         | (2,535 | ) |      |   | (10,782 | )
|                                                                                                        |  |                         |        |  
|Financing activities:                                                                                   |  |                         |        |   |      |   |         |  
|Principal payments on capital lease obligations                                                         |  |                         | (1     | ) |      |   | (11     | )
|                                                                                                        |  |                         |        |  
|Net cash used in financing activities from continuing operations                                        |  |                         | (1     | ) |      |   | (11     | )
|                                                                                                        |  |                         |        |  
|Decrease in cash and cash equivalents                                                                   |  |                         | (2,025 | ) |      |   | (8,165  | )
|Cash and cash equivalents at beginning of year                                                          |  |                         | 5,086  |   |      |   | 13,251  |  
|                                                                                                        |  |                         |        |  
|Cash and cash equivalents at end of year                                                                |  | $                       | 3,061  |   |      | $ | 5,086   |  
|                                                                                                        |  |                         |        |  
|                                                                                                        |  |                        
|Non-cash investing activities:                                                                          |  |                         |        |   |      |   |         |  
|Capital expenditures of $244 are included in Accounts Payable at December 31, 2007.                     |  |                         |        |   |      |   |         |  
|Significant non-cash financing activities:                                                              |  |                         |        |   |      |   |         |  
|Capital lease exchanged for operating lease                                                             |  | $                       |       |   |      | $ | 114     |  

For supplemental disclosures of cash flow information, see Note 3.

See accompanying notes to consolidated financial statements.



10



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Avalon Holdings Corporation and Subsidiaries





Consolidated Statements of Shareholders Equity

(in thousands)



|                             |  |                                           |  |              |  |   |         |  |             |         |  |  |   |         |  |   |         |   |  |   |        |  | 
|---------------------------- |  | ----------------------------------------- |  | ------------ |  | - | ------- |  | ----------- | ------- |  |  | - | ------- |  | - | ------- | - |  | - | ------ |  | 
|                             |  | For The Two Years Ended December 31, 2008
|                             |  |                                          
|                             |  | Shares                                    |  | Common Stock |  |   | Paid-in |  | Accumulated |         |  |  |   |        
|                             |  | Class A                                   |  | Class B      |  |   | Class A |  |             | Class B |  |  |   | Capital |  |   | Deficit |   |  |   | Total  | 
|                             |  |                                           |  |              |  |   |         |  |             |         |  |  |   |         |  |   |        
|Balance at January 1,
2007   |  | 3,191                                     |  | 612          |  | $ | 32      |  | $           | 6       |  |  | $ | 58,096  |  | $ | (20,156 | ) |  | $ | 37,978 | 
|                             |  |                                           | 
|Net income                   |  |                                          |  |             |  |   |        |  |             |        |  |  |   |        |  |   | 1,458   |   |  |   | 1,458  | 
|Balance at December 31,
2007 |  | 3,191                                     |  | 612          |  | $ | 32      |  | $           | 6       |  |  | $ | 58,096  |  | $ | (18,698 | ) |  | $ | 39,436 | 
|                             |  |                                           | 
|Net income                   |  |                                          |  |             |  |   |        |  |             |        |  |  |   |        |  |   | 738     |   |  |   | 738    | 
|Balance at December 31,
2008 |  | 3,191                                     |  | 612          |  | $ | 32      |  | $           | 6       |  |  | $ | 58,096  |  | $ | (17,960 | ) |  | $ | 40,174 | 
|                             |  |                                           | 

See accompanying notes to consolidated financial statements.



11



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Avalon Holdings Corporation and Subsidiaries





Notes to Consolidated Financial Statements



Note 1. Description of the Business Avalon Holdings Corporation (Avalon) was formed on April 30,
1998 as a subsidiary of American Waste Services, Inc. (AWS). Pursuant to the terms of a Contribution and Distribution Agreement dated as of May 7, 1998 between Avalon and AWS, AWS contributed to Avalon its transportation operations,
technical environmental services operations, waste disposal brokerage and management operations, and golf course and related operations, together with certain other assets including the headquarters of AWS and certain accounts receivable. In
connection with the contribution, Avalon also assumed certain liabilities of AWS. On June 17, 1998, AWS distributed, as a special dividend, all of the outstanding shares of capital stock of Avalon to the holders of AWS common stock on a pro
rata and corresponding basis. In 2002, Avalon sold all of the fixed assets of its analytical laboratory business and in January 2004, Avalon sold all of
the fixed assets of the remediation services business and discontinued the operations of the engineering and consulting services business. As such, the results, if any, of the technical environmental services are included in discontinued operations.
The captive landfill management operations, which were previously included in the technical environmental services segment, have been combined with the waste disposal brokerage and management services segment to form the waste management services
segment. In July 2004, Avalon sold its transportation operations and, as such, the results, if any, of the transportation operations are included in
discontinued operations. Avalon provides waste management services to industrial, commercial, municipal and governmental customers in selected
northeastern and midwestern U.S. markets. Avalon also owns the Avalon Golf and Country Club, which operates golf courses and related facilities. On
November 1, 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease has an initial term of ten (10) years with four (4) consecutive ten
(10) year renewal term options unilaterally exercisable by Avalon. The Squaw Creek Country Club is part of the Avalon Golf and Country Club. On
October 23, 2006, Avalon completed the acquisition of the Sharon Country Club assets for approximately $1 million in cash and the assumption of accounts receivable, certain leases and accounts payable. The primary assets of the Sharon Country
Club include the golf course and clubhouse. The clubhouse has been renovated and additional recreational facilities have been constructed.


The Sharon Country Club which is now known as the Avalon Country
Club at Sharon is part of the Avalon Golf and Country Club. Note 2. Summary of Significant Accounting Policies The significant accounting policies of Avalon, which are summarized below, are consistent with generally accepted accounting principles and reflect practices
appropriate to the businesses in which they operate. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to be consistent with the 2008 presentation. Principles of consolidation The consolidated financial statements
include the accounts of Avalon and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and cash equivalents Cash and cash equivalents include money market instruments and other highly liquid short-term investments that
are stated at cost, which approximates market value. Such investments, with original maturities of three months or less from date of purchase, are considered to be cash equivalents for purposes of the Consolidated Statements of Cash Flows and
Consolidated Balance Sheets. Such investments were not insured by the Federal Deposit Insurance Corporation. The balance of cash and cash equivalents was $3.1 million and $5.1 million at December 31, 2008 and 2007, respectively. Avalon maintains its cash balances in several financial institutions. These balances may, at times, exceed federal insured limits. Avalon has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk relating to its cash and cash equivalents.




12



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Avalon Holdings Corporation and Subsidiaries



Financial instruments The fair value of financial instruments
consisting of cash, cash equivalents, accounts receivable, and accounts payable at December 31, 2008 and 2007 approximates carrying value due to the relative short maturity of these financial instruments. Property and equipment Property and equipment is stated at cost and
depreciated using the straight-line method over the estimated useful life of the asset which varies from 10 to 30 years for land improvements; 5 to 50 years in the case of buildings and improvements; and from 3 to 10 years for machinery and
equipment, vehicles and office furniture and equipment (See Note 5). Major additions and improvements are charged to the property and equipment accounts
while replacements, maintenance and repairs, which do not improve or extend the life of the respective asset, are expensed currently. The cost of assets retired or otherwise disposed of and the related accumulated depreciation is eliminated from the
accounts in the year of disposal. Gains or losses resulting from disposals of property and equipment are credited or charged to operations currently. Interest costs, if any, would be capitalized on significant construction projects. Income taxes Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against net deferred tax assets when
management believes it is more likely than not that such deferred tax assets will not be realized. Avalon recognizes any interest and penalty assessed by
taxing authorities as a component of interest expense and other expense, respectively. Revenue recognition Avalon recognizes revenue for waste management services as services are performed. Revenues for the golf operations are recognized as services are provided with the
exception of membership dues which are recognized proportionately over twelve months based upon each members anniversary date. The deferred revenues


relating to membership dues at December 31, 2008 and December 31, 2007 were $2.0 million and $1.9 million, respectively, and are included in the Consolidated
Balance Sheets under the caption Other liabilities and accrued expenses. Accounts Receivable The majority of Avalons accounts receivable are due from industrial and commercial customers. Credit is extended based on an evaluation of a customers
financial condition and, generally, collateral is not required. Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered
past due. Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, Avalons previous accounts receivable loss history, the customers current ability to pay
its obligation to Avalon and the condition of the general economy and the industry as a whole. Avalon writes off accounts receivable when they become uncollectible. Payments subsequently received on such receivables are credited to the allowance for
doubtful accounts, or to income, as appropriate under the circumstances. Leases Avalon accounts for its lease agreements pursuant to Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases, which categorizes leases at their inception as either operating
or capital leases depending on certain defined criteria. Leasehold improvements are capitalized at cost and are amortized over the lesser of their expected useful life or the life of the lease (See Notes 3, 5 and 11). Asset impairments Effective January 1, 2002, Avalon adopted
SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets. In accordance with this statement, Avalon reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. If indicators of impairment exist, Avalon would determine whether the estimated undiscounted sum of the future cash flows of such assets and their eventual disposition is less than its carrying amount. If
less, an impairment loss would be recognized if, and to the extent that the carrying amount of such assets exceeds their respective fair value. Avalon would determine the fair value by using quoted market prices, if available, for such assets; or if
quoted market prices are not available, Avalon would discount the expected estimated future cash flows. Avalon does not believe there was a triggering event under SFAS No. 144 in 2008 or 2007 as the golf operations future cash flows have
not changed significantly and asset values have remained relatively stable.




13



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Avalon Holdings Corporation and Subsidiaries





Environmental liabilities When Avalon concludes that it is probable that a liability has been incurred with respect to a site, a provision
is made in Avalons financial statements for Avalons best estimate of the liability based on managements judgment and experience, information available from regulatory agencies, and the number, financial resources and relative
degree of responsibility of other potentially responsible parties who are jointly and severally liable for remediation of that site, as well as, the typical allocation of costs among such parties. If a range of possible outcomes is estimated and no
amount within the range appears to be a better estimate than any other, Avalon provides for the minimum amount within the range, in accordance with generally accepted accounting principles. The liability is recognized on an undiscounted basis.
Avalons estimates are revised, as deemed necessary, as additional information becomes known. Although Avalon is not currently aware of any environmental liability, there can be no assurance that in the future an environmental liability will
not occur. Basic net income per share For the years
ended December 31, 2008 and 2007, basic net income per share has been computed using the weighted average number of common shares outstanding during each period, which were 3,803,331. There were no common equivalent shares outstanding and
therefore, diluted per share amounts are equal to basic per share amounts for all years presented. Note 3. Capital Leased Assets On November 1, 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease
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 $7.3 million of leasehold
improvements as of December 31, 2008. Based upon the amount of leasehold improvements already made and leasehold improvements anticipated to be made in the future, Avalon expects to exercise all its renewal options. As a result of the purchase of assets of the Sharon Country Club and the assumption of certain liabilities in October 2006, Avalon recorded capital leases of $130,000
relating to the rental of golf carts. In 2007, this lease was exchanged for an operating lease.


Note 4. Discontinued Operations In January 2004, Avalon sold all of
the fixed assets of the remediation business. As part of the transaction, the purchaser assumed all of the remediation businesses 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. In the second
quarter of 2007, the remediation business agreed to a settlement on $.1 million from its customer for the payment of services provided on a project in 2002. The settlement is included in discontinued operations in the Consolidated Statements of
Operations for the year ended December 31, 2007. In January 2004, Avalon discontinued the engineering and consulting business. Income or expenses, if
any, related to the engineering and consulting business are included in discontinued operations. On July 15, 2004, Avalon completed the sale of its
transportation operations. Income and expenses, in any, related to the transportation operations are included in discontinued operations. Note 5.
Property and Equipment Property and equipment at December 31, 2008 and 2007 consists of the following (in thousands):  2008


2007Land and land improvements

$
11,740


$
10,963Buildings and improvements


19,708



9,747Machinery and equipment


2,768



1,396Vehicles


145



118Office furniture and equipment


2,837



1,808Construction in progress






11,13137,198



35,163Less: accumulated depreciation and amortization


(7,761
)


(6,595
)Property and equipment, net

$
29,437


$
28,568Leased property under capital leases at December 31, 2008 and 2007 consists of the following (in thousands):2008


2007Leased property under capital leases

$
7,266


$
6,794Less: accumulated amortization


(1,384
)


(1,035
)Leased property under capital leases, net

$
5,882


$
5,759




14



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Avalon Holdings Corporation and Subsidiaries





Note 6. Income Taxes Income before income taxes for each of the two years in the period ended December 31, 2008 was subject to
taxation under United States jurisdictions only. Total provisions for income taxes consist of the following (in thousands):  2008

2007Continuing operations

$
36

$
40Discontinued operations





$
36

$
40 The provision (benefit) for income taxes from continuing operations consists of the following (in thousands):  2008


2007Current:Federal

$



$
20State


40



3940



59Deferred:Federal






(20
)State


(4
)


1(4
)


(19
)$
36


$
40 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets
(liabilities) at December 31, 2008 and 2007 are as follows (in thousands):  2008


2007Deferred tax assets:Accounts receivable, allowance for doubtful accounts

$
130


$
95Reserves not deductible until paid


201



183Net operating loss carry-forwardsFederal


1,781



1,641State


591



439Capital loss carry-forward


2,851



2,851Other


63



25Gross deferred tax assets


5,617



5,234Less valuation allowance


(3,958
)


(3,976
)Deferred tax assets net of valuation allowance

$
1,659


$
1,258Deferred tax liabilities:Property and equipment

$
(1,634
)

$
(1,239
)Other






Gross deferred tax liabilities

$
(1,634
)

$
(1,239
)Net deferred tax asset

$
25


$
19


The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income
from continuing operations before income taxes as a result of the following differences (in thousands):  2008


2007Income before income taxes from continuing operations

$
774


$
1,385Federal statutory tax rate


35
%


35
%271



485State income taxes, net of federal income tax benefits


24



26Change in valuation allowance


(18
)


(437
)Other nondeductible expenses


37



33Increase in net operating loss carryforward: state


(84
)


(57
)federal


(165
)


Other, net


(29
)


(10
)$
36


$
40 Avalon adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007. The adoption of FIN 48 had no material impact on Avalons financial position or results of operations for the year 2008 and required no adjustment to the balance sheet accounts as of December 31, 2007. A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:  Balance at January 1, 2008

$
Increases related to prior year tax positions


Decreases related to prior year tax positions


Increases related to current year tax positions


Settlements


Lapse of Statute of Limitations


Balance at December 31, 2008

$
 Avalon is subject to income taxes in the U.S. federal and various states jurisdictions. With few exceptions,
Avalon is no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for the years before 2004. Avalon recognizes any interest and penalty assessed by taxing authorities as a component of interest expense and
other expense, respectively. Avalons accruals for the payment of interest and penalties for 2008 and 2007 were $-0- and $2,000, respectively. Avalon
made net income tax payments of $66,000 and $41,000 in 2008 and 2007, respectively. At December 31, 2008, Avalon has taxable loss carryforwards for
federal income tax purposes aggregating approximately $5,238,000 which are available to offset future federal taxable income. These carryforwards expire in 2021 through 2028. Avalon has a capital loss carryforward for federal income tax purposes of
approximately $8,385,000 which is available to offset future federal capital gain income. This carryforward expires in 2009. In addition, at December 31, 2008, certain subsidiaries of Avalon have net operating loss carryforwards for state
purposes which are available to




15



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Avalon Holdings Corporation and Subsidiaries





offset future state taxable income. These carryforwards expire at various dates through 2029. A valuation allowance has been provided because it is more
likely than not that the deferred tax assets relating to certain of the federal and state loss carryforwards will not be realized. Note 7. Retirement
Benefits Avalon sponsors a defined contribution profit sharing plan that is a qualified tax deferred benefit plan under Section 401(k) of the
Internal Revenue Code (the Plan). Substantially all employees are eligible to participate in the Plan. The Plan provides for employer discretionary cash contributions as determined by Avalons Board of Directors. Discretionary
contributions vest on a graduated basis and become 100% vested after five years of service. Plan participants may also contribute a portion of their annual compensation to the Plan, subject to maximums imposed by the Internal Revenue Code and
related regulations. Costs charged to operations for Avalons contributions were $126,000 and $117,000 for the years 2008 and 2007, respectively. These amounts are contributed in the year subsequent to the year expensed and are included in the
respective Consolidated Balance Sheets under the caption Other liabilities and accrued expenses. Note 8. Stock Option Plan Effective July 1, 1998, Avalon adopted the 1998 Long-term Incentive Plan which provides for the granting of options which are intended to be non-qualified stock
options (NQSOs) for federal income tax purposes except for those options designated as incentive stock options (ISOs) which qualify under Section 422 of the Internal Revenue Code. Avalon has reserved
1,300,000 shares of Class A Common Stock for issuance to employees and non-employee directors. NQSOs may be granted with an exercise price which is not less than 85% of the fair market value of the Class A Common Stock on the date of
grant. Options designated as ISOs shall not be less than 110% of fair market value for employees who are ten percent shareholders and not less than 100% of fair market value for other employees. The Board of Directors may, from time to time in
its discretion, grant options to one or more outside directors, subject to such terms and conditions as the Board of Directors may determine, provided that such terms and conditions are not inconsistent with other applicable provisions of the 1998
Long-term Incentive Plan. Options shall have a term of no longer than ten years from the date of grant; except that for an option designated as an ISO which is granted to a ten percent shareholder, the option shall have a term no longer than five
years. No option shall be exercisable prior to one year after its grant, unless otherwise provided by the Option Committee of the Board of Directors (but
in no event before 6 months after its grant), and thereafter options


shall become exercisable in installments, if any, as provided by the Option Committee. Options must be exercised for full shares of common stock. To the
extent that options are not exercised when they become initially exercisable, they shall be carried forward and be exercisable until the expiration of the term of such options. To date, no options have been granted under the 1998 Long-term Incentive
Plan. Note 9. Shareholders Equity Each share
of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes on all matters submitted to a vote of the shareholders. Except for the election of Avalons Board of Directors, the
Class A Common Stock and the Class B Common Stock vote together as a single class on all matters presented for a vote to the shareholders. However, with regard to the election of directors, for as long as the outstanding Class B Common Stock
has more than 50% of the total outstanding voting power of all common stock, the holders of the Class A Common Stock, voting as a separate class, will elect the number of directors equal to at least 25% of the total Board of Directors and the
holders of the Class B Common Stock, voting as a separate class, will elect the remaining directors. Thereafter, the holders of the Class A Common Stock (one vote per share) and Class B Common Stock (ten votes per share) will vote together as a
single class for the election of directors. The holders of a majority of all outstanding shares of Class A Common Stock or Class B Common Stock, voting as separate classes, must also approve amendments to the Articles of Incorporation that
adversely affect the shares of their class. Shares of Class A Common Stock and Class B Common Stock do not have cumulative voting rights. Each share
of Class B Common Stock is convertible, at any time, at the option of the shareholder, into one share of Class A Common Stock. Shares of Class B Common Stock are also automatically converted into shares of Class A Common Stock on the
transfer of such shares to any person other than Avalon, another holder of Class B Common Stock or a Permitted Transferee, as defined in Avalons Articles of Incorporation. The Class A Common Stock is not convertible. Note 10. 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, would have a material adverse effect on its liquidity, financial position or results of operations.




16



---

Avalon Holdings Corporation and Subsidiaries



Note 11. Lease Commitments Future commitments under long-term, operating leases and capital leases at December 31, 2008 are as
follows (in thousands):  Capital

Operating

Total2009


15


262


2772010


15


151


1662011


15


146


1612012


15


77


922013


15


7


22After 2013


585


0


585Total minimum lease payments

$
660

$
643

$
1,303Less: Amounts representing interest


429Present value of minimum payments


231Less: Current portion of obligations under capital leases


1Long-term portion of obligations under capital leases

$
230 Rental expense included in the Consolidated Statements of Operations amounted to $531,000 in 2008 and $493,000 in
2007. Note 12. Business Segment Information In
applying 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 to third parties. The
segment disclosures are presented on this basis for all years presented. Avalons primary business segment, the waste management services segment,
provides hazardous and nonhazardous 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 golf courses and related facilities and a travel agency. Revenue for the golf and related operations segment consists primarily of membership dues, greens fees, cart rentals, merchandise, and food and beverage sales. Avalon does not
have significant operations located outside the United States and, accordingly, geographical segment information is not presented. In 2008 and 2007, no
customer individually accounted for 10% or more of Avalons consolidated net operating revenues.


The accounting policies of the segments are consistent with
those described for the consolidated financial statements in the summary of significant accounting policies (see Note 2). 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 to consolidated income (loss) from continuing operations before taxes is as
follows (in thousands):  2008


2007Net operating revenues from:Waste management services:External customers revenues

$
39,381


$
38,073Intersegment revenues






11Total waste management services


39,381



38,084Golf and related operations:External customer revenues


9,597



7,359Intersegment revenues


48



47Total golf and related operations


9,645



7,406Segment operating revenues


49,026



45,490Intersegment eliminations


(48
)


(58
)Total net operating revenues

$
48,978


$
45,432Income (loss) from continuing operations before taxes:Waste management services

$
3,648


$
3,708Golf and related operations


(391
)


(345
)Other businesses






Segment income before taxes


3,257



3,363Corporate interest income


12



337Corporate other income, net


13



9General corporate expenses


(2,508
)


(2,324
)Income from continuing operations before taxes

$
774


$
1,385Depreciation and amortization:Waste management services

$
25


$
26Golf and related operations


1,387



935Corporate


134



138Total

$
1,546


$
1,099Interest income:Waste management services

$
34


$
84Golf and related operations


3



14Corporate


12



337Total

$
49


$
435Capital expenditures:Waste management services

$
18


$
51Golf and related operations


2,477



10,699Corporate


46



33Total

$
2,541


$
10,783Identifiable assets at December 31:Waste management services

$
13,823


$
9,978Golf and related operations


32,841



31,472Corporate


35,444



37,386Sub Total


82,108



78,836Elimination of intersegment receivables


(33,395
)


(30,987
)Total

$
48,713


$
47,849 The increase of $3.8 million in identifiable assets of the waste management services segment is primarily the
result of an increase in intersegment transactions which are




|   |  | 
|-- |  | 
|17 |  | 



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Avalon Holdings Corporation and Subsidiaries





eliminated in consolidation and an increase in accounts receivable. The increase of $1.4 million in identifiable assets of the golf and related operations
segment is primarily due to capital expenditures. Note 13. Recently Issued Financial Accounting Standards In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new measurements, but provides guidance on how to measure fair value by providing a fair
value hierarchy used to classify the source of information. This statement was effective January 1, 2008. The adoption of SFAS No. 157 did not have a material impact on its financial statements.






18



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Avalon Holdings Corporation and Subsidiaries







Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Directors of Avalon Holdings Corporation

We have audited the accompanying
consolidated balance sheets of Avalon Holdings Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders equity and cash flows for each of the two years in the
period ended December 31, 2008. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avalon Holdings
Corporation and subsidiaries as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.



|                      
|----------------------
|Grant Thornton LLP    
|                      
|/s/ Grant Thornton LLP
|                      
|Cleveland, Ohio       
|March 19, 2009        



19



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Avalon Holdings Corporation and Subsidiaries





Managements Annual report on Internal Control Over Financial Reporting

The management of Avalon, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control
over financial reporting, as defined in Rules 13a-15(f) of the Securities and Exchange Act of 1934, as amended. Avalons internal control system was designed to provide reasonable assurance as to the reliability of the preparation and
presentation of the consolidated financial statements for external reporting and the safeguarding of assets from unauthorized use or disposition.

All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2008,
based upon the framework and criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2008.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to
attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.



|                          |  |  |  |                        
|------------------------- |  |  |  | -----------------------
|/s/ Ronald E. Klingle     |  |  |  | /s/ Timothy C. Coxson  
|Chairman of the Board and |  |  |  | Chief Financial Officer
|Chief Executive Officer   |  |  |  |                        
|                          |  | 
|March 19, 2009            |  |  |  |                        



20



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Avalon Holdings Corporation and Subsidiaries







Company Location Directory



Corporate Office Avalon Holdings Corporation One American Way Warren, Ohio 44484-5555 (330) 856-8800 Waste Management Services American Waste Management Services, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800 American
Landfill Management, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800 American Construction Supply, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8800


Golf and Related Operations Avalon Golf and Country Club One American Way Warren, Ohio 44484-5555 (330) 856-8898 Avalon Lakes Golf Course One American Way Warren, Ohio 44484-5555 (330) 856-8898 Squaw Creek Golf Course 761 Youngstown-Kingsville Road Vienna, Ohio 44473 (330) 539-5103 Avalon Country Club at Sharon, Inc. 1030 Forker Blvd. Hermitage, PA 16148-1566 (724) 981-6700 Avalon Travel, Inc. One American Way Warren, Ohio 44484-5555 (330) 856-8400




21



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Avalon Holdings Corporation and Subsidiaries







Directors and Officers



Directors Ronald E. Klingle Chairman of the Board Executive Committee (Chairman) Compensation Committee Timothy C.
Coxson Treasurer, Chief Financial Officer and Secretary Compensation Committee (Chairman) Kurtis D. Gramley Chairman and Chief Executive Officer, Edgewood Surgical Hospital Audit Committee (Chairman) Executive Committee Option Plan
Committee Stephen L. Gordon Partner,
Beveridge & Diamond, P.C. Compensation Committee Audit Committee Option Plan Committee (Chairman) David G. Bozanich Director of Finance, City of Youngstown Audit Committee Executive
Committee Option Plan Committee


Officers Ronald E. Klingle Chief Executive Officer Timothy C. Coxson Treasurer, Chief Financial Officer and Secretary Frances R. Klingle Chief Administrative Officer Richard R. Fees Controller




22



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Avalon Holdings Corporation and Subsidiaries





Shareholder Information Common stock information Avalons Class A Common Stock is listed on the NYSE Alternext US Exchange (symbol: AWX). Quarterly stock
information for 2008 and 2007 as reported by The Wall Street Journal is as follows:  2008:Quarter Ended


High


Low


CloseMarch 31

$
6.24

$
4.23

$
5.97June 30


6.18


4.01


4.33September 30


4.50


3.25


3.25December 31


3.30


.92


1.48  2007:Quarter Ended


High


Low


CloseMarch 31

$
8.24

$
6.76

$
8.00June 30


10.87


7.95


9.90September 30


10.23


6.05


7.05December 31


8.10


5.25


5.40 No dividends were paid during 2008. There are 494 Class A and 10 Class B Common Stock shareholders of record as of the close of business March 5, 2009. The number of holders is based upon the actual holders registered on the records of
Avalons transfer agent and registrar and does not include holders of shares in street names or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository
trust companies. Dividend policy Avalon presently intends to retain earnings for use in the operation and expansion of its business and therefore, does not anticipate paying any cash dividends in the foreseeable future.


Annual report on Form 10-K Copies of Avalons annual report on Form 10-K can be obtained free of charge by writing to Avalon Holdings Corporation, One American Way, Warren, Ohio 44484-5555,
Attention: Shareholder Relations or by visiting Avalons web-site at www.avalonholdings.com. Transfer agent and registrar The transfer agent and registrar for Avalon is American Stock Transfer and Trust Company. All correspondence concerning stock transfers should be directed to them at 59
Maiden Lane, New York, New York 10038. Investor inquiries Security analysts, institutional investors, shareholders, news media representatives and others seeking financial information or general information about Avalon are invited to direct their inquiries to Timothy C. Coxson, Treasurer and
Chief Financial Officer, telephone (330) 856-8800.   Policy statement on equal employment opportunity and affirmative action Avalon is firmly committed to a policy of equal employment opportunity and affirmative action. Toward this end, Avalon will continue to recruit, hire, train and promote persons in all job titles, without regard to race, color, religion,
sex, national origin, age, handicap, ancestry or Vietnam-era or disabled veteran status. We will base all decisions on merit so as to further the principle of equal employment opportunity. This policy extends to promotions and to all actions
regarding employment including compensation, benefits, transfers, layoffs, returns from layoff, company-sponsored training and social programs.




23