Exhibit 13.1



Financial Highlights



(in thousands, except for per share amounts)



|                                                |  |      |        |   |      |   |        |  
|----------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|For the year                                    |  | 2004 |        |   | 2003 |  
|Net operating revenues                          |  | $    | 30,002 |   |      | $ | 24,734 |  
|Loss from continuing operations                 |  |      | (845   | ) |      |   | (1,816 | )
|Loss from discontinued operations               |  |      | (1,810 | ) |      |   | (1,828 | )
|Net loss                                        |  |      | (2,655 | ) |      |   | (3,644 | )
|Net loss per share from continuing operations   |  |      | (.22   | ) |      |   | (.48   | )
|Net loss per share from discontinued operations |  |      | (.48   | ) |      |   | (.48   | )
|Net loss per share                              |  |      | (.70   | ) |      |   | (.96   | )
|                                                |  |     
|At year-end                                     |  | 2004 |        |   | 2003 |  
|Working capital                                 |  | $    | 9,845  |   |      | $ | 7,195  |  
|Total assets                                    |  |      | 43,540 |   |      |   | 49,054 |  
|Shareholders equity                            |  |      | 36,259 |   |      |   | 38,920 |  



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 two golf courses and related facilities.



Contents



|                                                                                      |  |   
|------------------------------------------------------------------------------------- |  | --
|Financial Highlights                                                                  |  | 1 
|                                                                                      | 
|Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 2 
|                                                                                      | 
|Consolidated Balance Sheets                                                           |  | 11
|                                                                                      | 
|Consolidated Statements of Operations                                                 |  | 12
|                                                                                      | 
|Consolidated Statements of Cash Flows                                                 |  | 13
|                                                                                      | 
|Consolidated Statements of Shareholders Equity                                       |  | 14
|                                                                                      | 
|Consolidated Statements of Comprehensive Income (Loss)                                |  | 14
|                                                                                      | 
|Notes to Consolidated Financial Statements                                            |  | 15
|                                                                                      | 
|Report of Independent Registered Public Accounting Firm                               |  | 24
|                                                                                      | 
|Digest of Financial Data                                                              |  | 25
|                                                                                      | 
|Company Location Directory                                                            |  | 26
|                                                                                      | 
|Directors and Officers                                                                |  | 27
|                                                                                      | 
|Shareholder Information                                                               |  | 28



1



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



Avalon
entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease, which commenced November 1, 2003, has an initial term of ten (10) years with four (4) consecutive ten (10) year
renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given
year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations. Avalon has made $5.6 million of leasehold improvements as of December 31, 2004. 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.



Avalons aggregate capital expenditures in 2004 were $5.1 million which relate principally to the remodeling of the Squaw Creek facilities. Avalons aggregate
capital expenditures in 2005 are expected to be in the range of $.3 million to $.4 million, which will relate to building improvements and the purchase of golf equipment.



Working capital was $9.8 million at December 31, 2004 compared with $7.2 million at December 31, 2003. The increase is primarily the result
of a reclassification of noncurrent investments to short-term investments as a result of a change in maturity dates of certain investments and the increase in cash and cash equivalents relating to the proceeds received from the sale of DartAmericA,
Inc. (DartAmericA).



The increase in accounts receivable at
December 31, 2004 compared with December 31, 2003 is primarily due to the increased net operating revenues of the waste management services segment in the fourth quarter of 2004 compared with the fourth quarter of 2003.



The decrease in prepaid expenses at December 31, 2004 compared with December 31, 2003 is
primarily the result of decreased prepaid insurance premiums. Avalons insurance requirements were significantly reduced as a result of the sale of DartAmericA.



The increase in other assets, net at December 31, 2004 compared with December 31, 2003 reflects the noncurrent portion of a $1 million
promissory note received from BMC International, Inc. (BMC) to Avalon as part of the purchase price for DartAmericA.



The decrease in accounts payable at December 31, 2004 compared with December 31, 2003 is primarily due to the reduction in insurance premiums payable as a result of the
sale of DartAmericA, partially offset by an increase in accounts payable to waste facilities and transportation carriers as a result of increased net operating revenues of the waste brokerage and management services in the fourth quarter of 2004
compared with the fourth quarter of 2003.



2



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Avalon Holdings Corporation and Subsidiaries



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



On July 15, 2004, Avalon completed the sale of DartAmericA to BMC for a selling price of approximately $4.2 million. At the closing, BMC
delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable in 6 monthly installments of interest only and 54 equal monthly installments of $21,583 commencing February 15, 2005. The promissory note bears interest at a
rate of 6.875%. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericAs balance sheet items from March 31, 2004 to June 30, 2004. Such amount was paid in September 2004. In addition, DartAmericA
transferred to Avalon all of the accounts receivable outstanding for more than 60 days as of June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful accounts. Avalon collected the $.5 million in
receivables subsequent to the sale.



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



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



Several private country clubs in the northeast Ohio area are experiencing economic difficulties. Avalon believes some of these clubs may
represent an attractive investment opportunity and is giving consideration to the possibility of acquiring one or more additional golf courses. While Avalon has not entered into any pending agreements for acquisitions, it may do so at any time and
will continue to consider acquisitions that make economic sense. Such potential acquisitions could be financed by existing working capital, secured or unsecured debt, issuance of common stock, or issuance of a security with characteristics of both
debt and equity, any of which could impact liquidity in the future.



Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments.



The following table summarizes Avalons significant off-balance sheet contractual obligations at December 31, 2004, and the effect such obligations are expected to
have on Avalons liquidity and cash flows in future periods.



|                            |  |       |           |                 |   |           |  |           |         |                  |   |         |  |   |        
|--------------------------- |  | ----- | --------- | --------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------- |  | - | -------
|                            |  | Total |           | Less than1 year |   | 1-3 Years |  | 3-5 Years |         | More than5 years
|Operating lease obligations |  | $     | 1,111,000 |                 | $ | 341,000   |  | $         | 518,000 |                  | $ | 252,000 |  | $ | 0      
|Capital lease obligations   |  |       | 720,000   |                 |   | 15,000    |  |           | 30,000  |                  |   | 30,000  |  |   | 645,000
|                            |  |       |           |                 |   |           |  |           |         |                  |   |         |  |   |        
|                            |  | $     | 1,831,000 |                 | $ | 356,000   |  | $         | 548,000 |                  | $ | 282,000 |  | $ | 645,000
|                            |  |       |           |                 |   |           |  |           |         |                  |   |         |  |   |        



3



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Avalon Holdings Corporation and Subsidiaries



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 two golf courses and related facilities and a travel agency.



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



In addition, on June 25, 2004, Avalon announced that it had reached an
agreement in principle to sell all of the common stock of DartAmericA, Avalons transportation operations, to BMC. Based upon the proposed selling price and in accordance with Avalons asset impairment policy, Avalon recorded a write-down
of costs in excess of fair market value of net assets of acquired businesses (goodwill) of approximately $.5 million and a write-down of the long-lived assets of approximately $2.3 million in the second quarter of 2004. The results of
operations of the transportation operations for the current and prior years, including the write-down of goodwill and long-lived assets, have been included in discontinued operations. The transportation services segment has been eliminated and all
current and prior year segment information and Managements Discussion and Analysis of Financial Condition and Results of Operations have been restated to reflect this change.



On July 15, 2004, Avalon completed the sale of DartAmericA for a selling price of approximately $4.2 million. At the closing, BMC delivered
to Avalon $3 million in cash and a secured promissory note of $1 million payable in 6 monthly installments of interest only and 54 equal monthly installments of $21,583 commencing February 15, 2005. The promissory note bears interest at a rate of
6.875%. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericAs balance sheet items from March 31, 2004 to June 30, 2004. Such amount was paid in September 2004. By purchasing the common stock of
DartAmericA, BMC also acquired DartAmericAs wholly owned subsidiaries including Dart Trucking Company, Inc. (Dart) and Dart Services, Inc. and assumed Darts operating lease obligations of approximately $5 million. Prior to
the completion of the sale, DartAmericA transferred to Avalon, Dart Realty, Inc., a wholly owned subsidiary of DartAmericA, which owned the Canfield, Ohio terminal. Avalon intends to sell this facility. As a result, this facility is classified as
held-for-sale and the expenses related to the maintenance and operation of this facility are included in discontinued operations. In addition, DartAmericA transferred to Avalon all of the accounts receivable outstanding for more than 60 days as of
June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful accounts. Avalon collected the $.5 million in receivables subsequent to the sale.



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



4



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Avalon Holdings Corporation and Subsidiaries



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



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



Concurrent with the decision to discontinue the technical environmental
engineering and consulting business, Avalon decided to sell the building associated with the technical environmental services operations. Accordingly, the building is classified as held-for-sale and the expenses related to the maintenance and
operations of the building are included in discontinued operations. Based upon quoted estimated market prices, Avalon recorded a $.2 million write-down of the building in 2004 and a $1.6 million write-down of the building in 2003. Such write-downs
are included in discontinued operations.



As a result of the assets of the
remediation business being sold and the environmental engineering and consulting business being discontinued, Avalon has eliminated the technical environmental services segment. Avalons captive landfill management services, which was formerly
included in the technical environmental services segment has been combined with the waste brokerage and management services segment to form the waste management services segment. All current and prior year segment information and Managements
Discussion and Analysis of Financial Condition and Results of Operations have been restated to reflect this change.



Performance in 2004 compared with 2003



Overall Performance.



Net operating revenues increased to $30.0 million in 2004 compared with $24.7 million in 2003. The increase is primarily the result of higher net operating revenues of
both the waste management services segment and the golf and related operations segment. Costs of operations as a percentage of net operating revenues increased to 82.9% in 2004 compared with 82.4% in 2003. Consolidated selling, general and
administrative expenses decreased to $6.4 million in 2004 compared with $6.5 million in 2003 primarily as a result of a significant decrease in the provision for losses on accounts receivable and decreased employee costs, partially offset by
approximately $.5 million of bonuses paid to certain employees. In 2004, Avalon recorded charges to the provision for losses on accounts receivable of $.1 million compared with $.6 million in 2003. Avalon incurred a loss from continuing operations
of $.8 million in 2004 compared with a loss from continuing operations of $1.8 million in 2003.



Segment Performance. Segment performance should be read in conjunction with Note 13 to the Consolidated Financial Statements.



Net operating revenues of the waste management services segment increased to $25.7 million in 2004 compared with $22.3 million in 2003. The
increase in net operating revenues is primarily the result of an increase in the level of waste brokerage and management services provided, partially offset by a decrease in the services provided by the captive landfill management operation. Income
from continuing operations before taxes for the waste management services segment increased to $2.5 million in 2004 compared with $1.5 million in 2003 primarily as a result of the increased level of business of the waste brokerage and management
services, partially offset by a slight decrease in income from continuing operations before taxes of the captive landfill operations. In 2003, income from continuing operations before taxes included a charge of approximately $.5 million to the
provision for losses on accounts receivable due to customers filing bankruptcy.



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Avalon Holdings Corporation and Subsidiaries



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



Net operating revenues of the golf and related operations segment were $4.5 million in 2004 compared with $2.7 million in 2003. The golf courses, which are located in
Warren, Ohio and Vienna, Ohio, were closed during the first three months of 2004 and 2003 due to seasonality. The increase in net operating revenues are primarily attributable to significant increases in the average number of members of the Avalon
Golf and Country Club in 2004 compared with the prior year, which in turn has significantly increased membership dues, the number of rounds of golf played and food and beverage sales. Despite the increase in net operating revenues, income from
continuing operations before taxes decreased to $24,000 in 2004 compared with $66,000 in 2003, primarily as a result of additional operating expenses and employee costs incurred at the Squaw Creek facilities. Although there has been a significant
increase in the number of members of the Avalon Golf and Country Club, Avalon believes the combination of the Squaw Creek and Avalon Lakes facilities will result in additional memberships in the Avalon Golf and Country Club. As of December 31, 2004,
the Avalon Golf and Country Club has not attained its membership goals.



Interest Income



Interest income was $.2 million in
both 2004 and 2003.



General Corporate Expenses



General corporate expenses decreased to $3.4 million in 2004 compared with $3.6 million in
2003, primarily as a result of decreased employee costs partially offset by bonuses paid to certain employees.



Net Loss



Avalon incurred a net
loss of $2.7 million in 2004 compared with a net loss of $3.6 million in 2003. Although Avalon incurred a net loss in 2004 and 2003, Avalon did not record a tax benefit in either year. This was primarily the result of Avalon recording a valuation
allowance to reduce the deferred tax assets because Avalon believes it is more likely than not that the deferred tax assets will not be realized.



Performance in 2003 compared with 2002



Overall Performance.Avalons net operating revenues increased to $24.7 million in 2003 compared with $23.9 million in 2002. The increase is primarily
attributed to an increase in the net operating revenues of the golf and related operations segment. Costs of operations as a percentage of net operating revenues decreased to 82.4% in 2003 compared with 85.1% in 2002. Consolidated selling, general
and administrative expenses increased to $6.5 million in 2003 compared with $6.1 million in 2002, primarily as a result of increased employee costs. Avalon incurred a loss from continuing operations before taxes of $1.8 million in 2003 compared with
$2.2 million in 2002.



In the fourth quarter of 2003, management determined
that it was in Avalons best interest to sell or discontinue the operation of its environmental remediation business and to discontinue its engineering and consulting business.



6



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Avalon Holdings Corporation and Subsidiaries



Previously, in 2002, Avalon sold all of the operating assets of its analytical laboratory business. Accordingly, the results of the remediation business, the
engineering and consulting business and the laboratory business are reported as discontinued operations. Concurrent with the decision to discontinue the engineering and consulting business, Avalon decided to sell the building associated with the
technical environmental services operations. Accordingly, in the fourth quarter of 2003, the building was classified as held-for-sale and, based upon a quoted estimated market price, Avalon recorded a charge of $1.6 million for the write-down of the
building which is included in discontinued operations in 2003.



Segment
Performance. Segment performance should be read in conjunction with Note 13 to the Consolidated Financial Statements.



Net operating revenues of the waste management services segment decreased to $22.3 million in 2003 compared with $22.5 million in 2002. The decrease in net operating
revenues is primarily the result of a decrease in the level of services provided by the waste brokerage and management business partially offset by an increase in the services provided by the captive landfill management operation. Income before
taxes was $1.5 million in 2003 compared with $1.1 million in 2002. The increase was primarily the result of higher gross margins of the waste brokerage and management business and to a lesser extent the improved operating results of the captive
landfill management operations as a result of the increased net operating revenues.



Net operating revenues of the golf and related operations segment increased to $2.7 million in 2003 compared with $1.9 million in 2002. The golf course owned by Avalon, which is located in Warren, Ohio, was closed during the first three
months of 2003 and 2002 due to seasonality. The golf and related operations segment recorded income from continuing operations before taxes of $.1 million in 2003 compared with a loss from continuing operations before taxes of $.3 million in 2002.
The increase in net operating revenues and income before taxes is primarily attributed to a significant increase in the number of members of the Avalon Golf and Country Club in 2003 compared with the prior year, which in turn has significantly
increased the number of rounds of golf played and increased food and beverage sales. The financial performance of the golf and related operations segment was negatively impacted by adverse weather conditions during the second and third quarters of
2003.



Avalon did not acquire rights to the Squaw Creek Country Club facility
until November 2003. As such, net operating revenues and results of operations relating to such facility were not material in 2003.



Interest Income



Interest income was $.2 million in 2003 and 2002.



General Corporate Expenses



General corporate expenses
increased to $3.6 million in 2003 compared with $3.2 million in 2002 primarily as a result of increased employee costs.



Net Loss



Avalon incurred a net loss of $3.6 million in 2003 compared with a net loss of $5.8 million in 2002. Although Avalon incurred a net loss in 2003 and 2002, Avalon recorded a small tax provision in both years instead of
a tax benefit. This was the result of Avalon recording a valuation allowance to reduce the deferred tax assets because Avalon believes it is more likely than not that the deferred tax assets will not be realized.



7



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Avalon Holdings Corporation and Subsidiaries



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



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



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



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



A significant portion of Avalons business is not subject to long-term contracts. In
light of current economic, regulatory and competitive conditions, there can be no assurance that Avalons current customers will continue to transact business with Avalon at historical levels. Failure by Avalon to retain its current customers
or to replace lost business could adversely impact the future financial performance of Avalon.



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



As a result of the acquisition of rights to the Squaw Creek facilities, the Avalon Lakes Golf Club has become the Avalon Golf and Country Club. In addition to a second
championship golf course, the Squaw Creek facilities include a swimming pool, tennis courts and a clubhouse that provides dining and banquet facilities. The Avalon Golf and Country Club competes with many public courses and country clubs in the
area. Although the golf courses will continue to be available to the general public, the primary source of revenues will be derived from the members of the Avalon Golf and Country Club. Avalon believes that the combination of the Squaw Creek and
Avalon Lakes facilities will result in a significant increase in the number of members of the Avalon Golf and Country Club. Such increased membership, if attained, will result in increased net operating revenues; however, there can be no assurance
as to when such increased membership will be attained. Failure by Avalon to attain increased membership could adversely affect the future financial performance of Avalon. Although Avalon has had a substantial increase in the number of members of the
Avalon Golf and Country Club, as of December 31, 2004, Avalon has not attained its membership goals.



8



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Avalon Holdings Corporation and Subsidiaries



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



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



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



Market Risk



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



Avalon does not purchase or hold any derivative financial instruments.



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 price 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 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 and payments
subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.



9



---

Avalon Holdings Corporation and Subsidiaries



Avalons allowance for doubtful accounts is based on managements assessment of the collectibility of
specific customers accounts and the aging of accounts receivable. 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.



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 determines impairment on its note receivable considering a number of factors,
including length of time scheduled payments are past due, the obligors current ability to pay its obligation to Avalon, correspondence with the obligor and other applicable factors. If, after consideration of these factors, it appears that the
note receivable is impaired, management would record an impairment charge sufficient to reduce the carrying value of the note receivable to its estimated realizable value.



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 as of 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.



Avalon records a valuation allowance to reduce deferred tax assets when it is more likely
than not that the deferred tax assets relating to certain federal and state loss carryforwards will not be realized.



10



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Avalon Holdings Corporation and Subsidiaries



Consolidated Balance Sheets

(in thousands, except for share data)



|                                                                                                                                                                           |  |              |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                           |  | December 31, |        
|                                                                                                                                                                           |  | 2004         |         |   | 2003 |  
|Assets                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Current Assets:                                                                                                                                                            |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                  |  | $            | 7,861   |   |      | $ | 3,224   |  
|Short-term investments (Note 3)                                                                                                                                            |  |              | 1,598   |   |      |   |        |  
|Accounts receivable, less allowance for doubtful accounts of $569 in 2004 and $527 in 2003                                                                                 |  |              | 5,299   |   |      |   | 3,620   |  
|Prepaid expenses                                                                                                                                                           |  |              | 255     |   |      |   | 1,448   |  
|Other current assets                                                                                                                                                       |  |              | 226     |   |      |   | 218     |  
|Current assets  discontinued operations (Note 5)                                                                                                                          |  |              | 1,632   |   |      |   | 8,819   |  
|                                                                                                                                                                           |  |              |         |   |      |   |         |  
|Total current assets                                                                                                                                                       |  |              | 16,871  |   |      |   | 17,329  |  
|                                                                                                                                                                           |  |             
|Noncurrent investments (Note 3)                                                                                                                                            |  |              |        |   |      |   | 6,009   |  
|Property and equipment, net (Note 6)                                                                                                                                       |  |              | 17,774  |   |      |   | 18,392  |  
|Leased property under capital leases, net (Notes 4 and 6)                                                                                                                  |  |              | 5,519   |   |      |   | 474     |  
|Other assets, net                                                                                                                                                          |  |              | 880     |   |      |   | 80      |  
|Noncurrent assets  discontinued operations (Note 5)                                                                                                                       |  |              | 2,496   |   |      |   | 6,770   |  
|                                                                                                                                                                           |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                               |  | $            | 43,540  |   |      | $ | 49,054  |  
|                                                                                                                                                                           |  |              |         |   |      |   |         |  
|Liabilities and Shareholders Equity                                                                                                                                       |  |              |         |   |      |   |         |  
|Current Liabilities:                                                                                                                                                       |  |              |         |   |      |   |         |  
|Current portion of obligations under capital leases (Notes 4 and 12)                                                                                                       |  | $            | 1       |   |      | $ |        |  
|Accounts payable                                                                                                                                                           |  |              | 3,797   |   |      |   | 4,035   |  
|Accrued payroll and other compensation                                                                                                                                     |  |              | 457     |   |      |   | 230     |  
|Accrued income taxes                                                                                                                                                       |  |              | 183     |   |      |   | 242     |  
|Other accrued taxes                                                                                                                                                        |  |              | 210     |   |      |   | 295     |  
|Other liabilities and accrued expenses (Note 8)                                                                                                                            |  |              | 1,629   |   |      |   | 1,447   |  
|Current liabilities  discontinued operations (Note 5)                                                                                                                     |  |              | 749     |   |      |   | 3,885   |  
|                                                                                                                                                                           |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                                                                  |  |              | 7,026   |   |      |   | 10,134  |  
|                                                                                                                                                                           |  |             
|Other noncurrent liabilities                                                                                                                                               |  |              | 21      |   |      |   |        |  
|Obligations under capital leases (Notes 4 and 12)                                                                                                                          |  |              | 234     |   |      |   |        |  
|Contingencies and commitments (Notes 11 and 12)                                                                                                                            |  |              |        |   |      |   |        |  
|                                                                                                                                                                           |  |             
|Shareholders Equity (Note 10):                                                                                                                                            |  |              |         |   |      |   |         |  
|Class A Common Stock, $.01 par value, one vote per share; authorized 10,500,000 shares; issued and outstanding 3,185,240 shares at December
31, 2004 and December 31, 2003 |  |              | 32      |   |      |   | 32      |  
|Class B Common Stock, $.01 par value, ten votes per share; authorized 1,000,000 shares; issued and outstanding 618,091 shares at December 31,
2004 and December 31, 2003   |  |              | 6       |   |      |   | 6       |  
|Paid-in capital                                                                                                                                                            |  |              | 58,096  |   |      |   | 58,096  |  
|Accumulated deficit                                                                                                                                                        |  |              | (21,873 | ) |      |   | (19,218 | )
|Accumulated other comprehensive income (loss)                                                                                                                              |  |              | (2      | ) |      |   | 4       |  
|                                                                                                                                                                           |  |              |         |   |      |   |         |  
|Total shareholders equity                                                                                                                                                 |  |              | 36,259  |   |      |   | 38,920  |  
|                                                                                                                                                                           |  |              |         |   |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                                 |  | $            | 43,540  |   |      | $ | 49,054  |  
|                                                                                                                                                                           |  |              |         |   |      |   |         |  



See accompanying notes to
consolidated financial statements.



11



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Avalon Holdings Corporation and Subsidiaries



Consolidated Statements of Operations



(in thousands, except for per share amounts)



|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                       |  | Year Ended December 31, |       
|                                                       |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Net operating revenues                                 |  | $                       | 30,002 |   |      | $ | 24,734 |      |  | $ | 23,929 |  
|                                                       |  |                         |       
|Costs and expenses:                                    |  |                         |        |   |      |   |        |      |  |   |        |  
|Costs of operations                                    |  |                         | 24,840 |   |      |   | 20,393 |      |  |   | 20,361 |  
|Selling, general and administrative expenses           |  |                         | 6,377  |   |      |   | 6,530  |      |  |   | 6,104  |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Operating loss from continuing operations              |  |                         | (1,215 | ) |      |   | (2,189 | )    |  |   | (2,536 | )
|                                                       |  |                         |       
|Other income:                                          |  |                         |        |   |      |   |        |      |  |   |        |  
|Interest expense                                       |  |                         | (15    | ) |      |   |       |      |  |   |       |  
|Interest income                                        |  |                         | 195    |   |      |   | 168    |      |  |   | 227    |  
|Other income, net                                      |  |                         | 190    |   |      |   | 209    |      |  |   | 148    |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Loss from continuing operations before income taxes    |  |                         | (845   | ) |      |   | (1,812 | )    |  |   | (2,161 | )
|                                                       |  |                         |       
|Provision for income taxes (Note 7):                   |  |                         |        |   |      |   |        |      |  |   |        |  
|Current                                                |  |                         |       |   |      |   | 4      |      |  |   | 10     |  
|Deferred                                               |  |                         |       |   |      |   |       |      |  |   |       |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|                                                       |  |                         |       |   |      |   | 4      |      |  |   | 10     |  
|                                                       |  |                         |       
|Loss from continuing operations                        |  |                         | (845   | ) |      |   | (1,816 | )    |  |   | (2,171 | )
|                                                       |  |                         |       
|Discontinued operations (Note 5):                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Loss from discontinued operations before income taxes1 |  |                         | (1,810 | ) |      |   | (1,858 | )    |  |   | (3,138 | )
|Provision (benefit) for income taxes                   |  |                         |       |   |      |   | (30    | )    |  |   | 529    |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Loss from discontinued operations                      |  |                         | (1,810 | ) |      |   | (1,828 | )    |  |   | (3,667 | )
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Net loss                                               |  | $                       | (2,655 | ) |      | $ | (3,644 | )    |  | $ | (5,838 | )
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Net loss per share from continuing operations          |  | $                       | (.22   | ) |      | $ | (.48   | )    |  | $ | (.57   | )
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Net loss per share from discontinued operations        |  | $                       | (.48   | ) |      | $ | (.48   | )    |  | $ | (.97   | )
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Net loss per share (Note 2)                            |  | $                       | (.70   | ) |      | $ | (.96   | )    |  | $ | (1.54  | )
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  
|Weighted average shares outstanding (Note 2)           |  |                         | 3,803  |   |      |   | 3,803  |      |  |   | 3,803  |  
|                                                       |  |                         |        |   |      |   |        |      |  |   |        |  

---

|1 | Year ended December 31, 2004 includes a write-down of goodwill of $.5 million, a write-down of long-lived assets of $2.3 million, a write-down of a building of $.2
million, a bad debt recovery of $1.5 million and gains on sale of assets of $.5 million.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Year ended December 31, 2003 includes a write-down of a building of $1.6 million.



Year ended December 31, 2002 includes a loss on sale of assets of $.1 million.



See accompanying notes to consolidated financial statements.



12



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Avalon Holdings Corporation and Subsidiaries



Consolidated Statements of Cash Flows

(in thousands)



|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                      |  | Year Ended December 31, |       
|                                                                                                      |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Operating activities:                                                                                 |  |                         |        |   |      |   |        |      |  |   |        |  
|Loss from continuing operations                                                                       |  | $                       | (845   | ) |      | $ | (1,816 | )    |  | $ | (2,171 | )
|Reconciliation of loss from continuing operations to cash provided by (used in) operating activities: |  |                         |        |   |      |   |        |      |  |   |        |  
|Depreciation                                                                                          |  |                         | 886    |   |      |   | 793    |      |  |   | 758    |  
|Amortization                                                                                          |  |                         | 1      |   |      |   | 1      |      |  |   | 1      |  
|Amortization of investments                                                                           |  |                         | 8      |   |      |   | 57     |      |  |   | 106    |  
|Provision for losses on accounts receivable                                                           |  |                         | 107    |   |      |   | 584    |      |  |   | 488    |  
|Gain from disposal of property and equipment                                                          |  |                         |       |   |      |   | (31    | )    |  |   | (8     | )
|Gain on sale of investments                                                                           |  |                         | (2     | ) |      |   |       |      |  |   | (2     | )
|Change in operating assets and liabilities:                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Accounts receivable                                                                                   |  |                         | (1,786 | ) |      |   | 146    |      |  |   | 691    |  
|Prepaid expenses                                                                                      |  |                         | 1,193  |   |      |   | (28    | )    |  |   | (210   | )
|Other current assets                                                                                  |  |                         | (8     | ) |      |   | (123   | )    |  |   | 21     |  
|Other assets                                                                                          |  |                         | (801   | ) |      |   | 1      |      |  |   | (22    | )
|Accounts payable                                                                                      |  |                         | (238   | ) |      |   | 1,152  |      |  |   | (168   | )
|Accrued payroll and other compensation                                                                |  |                         | 227    |   |      |   | 70     |      |  |   | (25    | )
|Accrued income taxes                                                                                  |  |                         | (59    | ) |      |   | 6      |      |  |   | 20     |  
|Other accrued taxes                                                                                   |  |                         | (85    | ) |      |   | 24     |      |  |   | 120    |  
|Other liabilities and accrued expenses                                                                |  |                         | 182    |   |      |   | 639    |      |  |   | 248    |  
|Other noncurrent liabilities                                                                          |  |                         | 21     |   |      |   |       |      |  |   |       |  
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash (used in) provided by operating activities from continuing operations                        |  |                         | (1,199 | ) |      |   | 1,475  |      |  |   | (153   | )
|Net cash provided by (used in) operating activities from discontinued operations                      |  |                         | 2,241  |   |      |   | 1,384  |      |  |   | (141   | )
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided (used in) by operating activities                                                   |  |                         | 1,042  |   |      |   | 2,859  |      |  |   | (294   | )
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Investing activities:                                                                                 |  |                         |        |   |      |   |        |      |  |   |        |  
|Purchases of available-for-sale investments                                                           |  |                         |       |   |      |   | (6,009 | )    |  |   |       |  
|Maturities/sales of available-for-sale investments                                                    |  |                         | 4,399  |   |      |   | 5,838  |      |  |   | 1,900  |  
|Capital expenditures                                                                                  |  |                         | (5,154 | ) |      |   | (607   | )    |  |   | (2,488 | )
|Proceeds from the sale of facilities                                                                  |  |                         | 3,192  |   |      |   |       |      |  |   |       |  
|Proceeds from disposal of property and equipment                                                      |  |                         | 79     |   |      |   | 64     |      |  |   | 11     |  
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) investing activities from continuing operations                        |  |                         | 2,516  |   |      |   | (714   | )    |  |   | (577   | )
|Net cash provided by (used in) investing activities from discontinued operations                      |  |                         | 1,082  |   |      |   | (111   | )    |  |   | (229   | )
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) investing activities                                                   |  |                         | 3,598  |   |      |   | (825   | )    |  |   | (806   | )
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Financing activities:                                                                                 |  |                         |        |   |      |   |        |      |  |   |        |  
|Principal payments on capital lease obligations                                                       |  |                         | (3     | ) |      |   |       |      |  |   |       |  
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash used in financing activities from continuing operations                                      |  |                         | (3     | ) |      |   |       |      |  |   |       |  
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Increase (decrease) in cash and cash equivalents                                                      |  |                         | 4,637  |   |      |   | 2,034  |      |  |   | (1,100 | )
|Cash and cash equivalents at beginning of year                                                        |  |                         | 3,224  |   |      |   | 1,190  |      |  |   | 2,290  |  
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents at end of year                                                              |  | $                       | 7,861  |   |      | $ | 3,224  |      |  | $ | 1,190  |  
|                                                                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Significant non-cash investing and financing activities:                                              |  |                         |        |   |      |   |        |      |  |   |        |  
|Capital lease obligations incurred                                                                    |  | $                       | 238    |   |      | $ |       |      |  | $ |       |  



For supplemental disclosures of
cash flow information, see Note 7.

See accompanying notes to consolidated financial statements.



13



---

Avalon Holdings Corporation and Subsidiaries



Consolidated Statements of Shareholders Equity

(in thousands)



|                               |  |                                             |  |              |  |                 |    |                     |   |   |                                               |   |        |       |   |         |   |  |   |     |   |  |   |        |  
|------------------------------ |  | ------------------------------------------- |  | ------------ |  | --------------- | -- | ------------------- | - | - | --------------------------------------------- | - | ------ | ----- | - | ------- | - |  | - | --- | - |  | - | ------ | -
|                               |  | For The Three Years Ended December 31, 2004 | 
|                               |  | Shares                                      |  | Common Stock |  | Paid-in Capital |    | Accumulated Deficit |   |   | Accumulated Other Comprehensive Income (loss) |   |        | Total |  
|                               |  | Class A                                     |  | Class B      |  | Class A         |    | Class B             |   |   |                                               |  
|Balance at January 1, 2002     |  | 3,185                                       |  | 618          |  | $               | 32 |                     | $ | 6 |                                               | $ | 58,096 |       | $ | (9,736  | ) |  | $ |    |   |  | $ | 48,398 |  
|Net loss                       |  |                                            |  |             |  |                 |   |                     |   |  |                                               |   |       |       |   | (5,838  | ) |  |   |    |   |  |   | (5,838 | )
|Unrealized gain on investments |  |                                            |  |             |  |                 |   |                     |   |  |                                               |   |       |       |   |        |   |  |   | 74  |   |  |   | 74     |  
|                               |  |                                             |  |              |  |                 |    |                     |   |   |                                               |   |        |       |   |         |   |  |   |     |   |  |   |        |  
|Balance at December 31, 2002   |  | 3,185                                       |  | 618          |  |                 | 32 |                     |   | 6 |                                               |   | 58,096 |       |   | (15,574 | ) |  |   | 74  |   |  |   | 42,634 |  
|Net loss                       |  |                                            |  |             |  |                 |   |                     |   |  |                                               |   |       |       |   | (3,644  | ) |  |   |    |   |  |   | (3,644 | )
|Unrealized loss on investments |  |                                            |  |             |  |                 |   |                     |   |  |                                               |   |       |       |   |        |   |  |   | (70 | ) |  |   | (70    | )
|                               |  |                                             |  |              |  |                 |    |                     |   |   |                                               |   |        |       |   |         |   |  |   |     |   |  |   |        |  
|Balance at December 31, 2003   |  | 3,185                                       |  | 618          |  |                 | 32 |                     |   | 6 |                                               |   | 58,096 |       |   | (19,218 | ) |  |   | 4   |   |  |   | 38,920 |  
|Net loss                       |  |                                            |  |             |  |                 |   |                     |   |  |                                               |   |       |       |   | (2,655  | ) |  |   |    |   |  |   | (2,655 | )
|Unrealized loss on investments |  |                                            |  |             |  |                 |   |                     |   |  |                                               |   |       |       |   |        |   |  |   | (6  | ) |  |   | (6     | )
|                               |  |                                             |  |              |  |                 |    |                     |   |   |                                               |   |        |       |   |         |   |  |   |     |   |  |   |        |  
|Balance at December 31, 2004   |  | 3,185                                       |  | 618          |  | $               | 32 |                     | $ | 6 |                                               | $ | 58,096 |       | $ | (21,873 | ) |  | $ | (2  | ) |  | $ | 36,259 |  
|                               |  |                                             |  |              |  |                 |    |                     |   |   |                                               |   |        |       |   |         |   |  |   |     |   |  |   |        |  



Consolidated Statements of
Comprehensive Income(Loss)

(in thousands)



|                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                      |  | Year Ended December 31, |       
|                                      |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Net loss                              |  | $                       | (2,655 | ) |      | $ | (3,644 | )    |  | $ | (5,838 | )
|Unrealized (loss) gain on investments |  |                         | (6     | ) |      |   | (70    | )    |  |   | 74     |  
|                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|Comprehensive income (loss)           |  | $                       | (2,661 | ) |      | $ | (3,714 | )    |  | $ | (5,764 | )
|                                      |  |                         |        |   |      |   |        |      |  |   |        |  



See accompanying notes to
consolidated financial statements.



14



---

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 (the Spin-off).



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 technical environmental services segment has been eliminated.
The results of these operations are included in discontinued operations. All prior years information has been restated to reflect this change. The captive landfill management operations which were previously included in the technical environmental
services segment has been combined with the waste disposal brokerage and management services segment to form the waste management services segment.



In July 2004, Avalon sold all of the common stock of DartAmericA, Inc., Avalons transportation operations. DartAmericA, Inc.s wholly owned subsidiaries, Dart
Trucking Company, Inc. and Dart Services, Inc., were included in the sale. As a result, the transportation services segment has been eliminated. The results of the transportation operations are included in discontinued operations. All current and
prior year information has been restated to reflect this change.



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



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 2004 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. The balance of such cash equivalents was $7,780,000 and $3,160,000 at December 31, 2004 and 2003, respectively. Such investments were not insured by the Federal Deposit Insurance Corporation.



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 cash and cash equivalents.



Investment securities



Avalon classifies its investment securities into trading, available-for-sale, or held-to-maturity categories. Securities are classified as
trading when Avalon has the intent of selling them in the near term. Trading securities are reported at fair value on the balance sheet, with the change in fair value during the period included in earnings. Securities are classified as
held-to-maturity when Avalon has the ability and intent to hold the securities to maturity. Held-to-maturity securities are reported as either short-term or noncurrent on the balance sheet based upon contractual maturity date and are stated at
amortized cost. Securities that are not classified as either trading or held-to-maturity are classified as available-for-sale and reported at fair value on the balance sheet with the change in fair value reported as a component of other
comprehensive income (see Note 3).



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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, 2004
and 2003, approximates carrying value due to the relative short maturity of these financial instruments. The fair value of available-for-sale investments, based upon market quotes, was $1,598,000 at December 31, 2004 and $6,009,000 at December 31,
2003. The fair value of the secured note receivable approximates its carrying value of $1 million at December 31, 2004, based upon an evaluation of prevailing market interest rates and other applicable factors.



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 6).



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 it is
determined that it is more likely than not that such deferred tax assets will not be realized.



Revenue recognition



Avalon recognizes
revenue for waste management services as services are performed. Revenue for golf operations are recognized as services are provided with the exception of membership dues which, beginning in 2004, are prorated monthly over the entire year.
Previously, membership dues were prorated monthly from May through October.



Accounts Receivable



The majority of Avalons accounts
receivable are due from industrial and commercial customers. Credit is extended based on 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 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 and payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.



Asset impairments



Effective January 1, 2002, Avalon adopted SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with this statement, Avalon performs tests for
impairment of goodwill annually or whenever circumstances indicate a potential impairment. In determining whether an impairment exists, Avalon compares the fair value of the reporting unit associated with the goodwill to the carrying value of its
net assets, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the implied fair value of reporting unit goodwill is compared to the carrying amount of that goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to the excess. Avalon determines the fair value using a variety of methods including quoted market prices, cash flow analyses and
estimates of earnings or revenues. Where applicable, an appropriate discount rate is used.



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 (other than goodwill) 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 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 values. 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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Avalon Holdings Corporation and Subsidiaries



Avalon determines impairment on its note receivable considering a number of factors, including length of time
scheduled payments are past due, the obligors current ability to pay its obligation to Avalon, correspondence with the obligor and other applicable factors. If, after consideration of these factors, it appears that the note receivable is
impaired, management would record an impairment charge sufficient to reduce the carrying value of the note receivable to its estimated realizable value.



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, 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.



Basic net income (loss)
per share



For the years ended December 31, 2004, 2003 and 2002 basic net
income (loss) per share has been computed using the weighted average number of common shares outstanding during each period, which was 3,803,331. There were no common equivalent shares outstanding and therefore diluted per share amounts are equal to
basic per share amounts for all years presented.



Note 3. Investments



Avalon held available-for-sale securities of $1,598,000 at December 31,
2004 which are included in the Consolidated Balance Sheets under the caption Short-term investments. At December 31, 2003, Avalon held available-for-sale securities of $6,009,000 which are included in the Consolidated Balance Sheets
under the caption Noncurrent investments. As a result of the classification of these securities as available-for-sale, Avalon recognized unrealized losses of $6,000 and $70,000, net of applicable income taxes, for the years ended
December 31, 2004 and 2003, respectively, and net unrealized gains of $74,000, net of applicable income taxes, for the year ended December 31, 2002, as a component of other comprehensive income (loss).



Accumulated other comprehensive income (loss) consisted of an unrealized loss of $2,000 at
December 31, 2004 and an unrealized gain of $4,000 at December 31, 2003.



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



|                    |  |                   |       |                         |   |    |                      |  |   |      
|------------------- |  | ----------------- | ----- | ----------------------- | - | -- | -------------------- |  | - | -----
|                    |  | December 31, 2004
|                    |  | Amortized Cost    |       | Gross Unrealized Losses |   |    | Estimated Fair Value
|Available-for-Sale  |  |                   |       |                         |   |    |                      |  |   |      
|U.S. Treasury Notes |  | $                 | 1,600 |                         | $ | (2 | )                    |  | $ | 1,598
|                    | 
|                    |  | December 31, 2003
|                    |  | Amortized Cost    |       | Gross Unrealized Gains  |   |    | Estimated Fair Value
|Available-for-Sale  |  |                   |       |                         |   |    |                      |  |   |      
|U.S. Treasury Notes |  | $                 | 6,005 |                         | $ | 4  |                      |  | $ | 6,009



The amortized cost and
estimated fair value of available-for-sale investments at December 31, 2004, by contractual maturity, consists of the following (in thousands):



|                                      |  |                    |       |                      |   |      
|------------------------------------- |  | ------------------ | ----- | -------------------- | - | -----
|                                      |  | Available-For-Sale
|                                      |  | Amortized Cost     |       | Estimated Fair Value
|Due in one year or less               |  | $                  | 1,600 |                      | $ | 1,598
|Due after one year through five years |  |                    |      |                      |   |     
|                                      |  |                    |       |                      |   |      
|Total                                 |  | $                  | 1,600 |                      | $ | 1,598
|                                      |  |                    |       |                      |   |      



Note 4. Capital Leased Assets



Avalon entered into a long-term agreement with Squaw Creek Country Club
to lease and operate its golf course and related facilities. The lease, which commenced November 1, 2003, has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under
the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to
future leasehold improvement obligations. Avalon has made $5.6 million of leasehold improvements as of December 31, 2004. 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 $5.6 million of leasehold improvements made in the first year of the lease, the lease is deemed to have been modified and, as such, has been reclassified and recorded as a
capital lease instead of an operating lease as originally recorded.



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Avalon Holdings Corporation and Subsidiaries



Note 5. Discontinued Operations



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



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



On July 15, 2004, Avalon completed the sale of DartAmericA for a selling price of
approximately $4.2 million. At the closing, BMC delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable in 6 monthly installments of interest only and 54 equal monthly installments of $21,583 commencing February
15, 2005. The promissory note bears interest at a rate of 6.875%. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericAs balance sheet items from March 31, 2004 to June 30, 2004. Such amount was paid
in September 2004. By purchasing the common stock of DartAmericA, BMC also acquired DartAmericAs wholly owned subsidiaries including Dart Trucking Company, Inc. (Dart) and Dart Services, Inc. and assumed Darts operating lease
obligations of approximately $5 million. Prior to the completion of the sale, DartAmericA transferred to Avalon, Dart Realty, Inc., a wholly owned subsidiary of DartAmericA, which owned the Canfield, Ohio terminal. Avalon intends to sell this
facility. As a result, this facility is classified as held-for-sale and the expenses related to the maintenance and operation of this facility are included in discontinued operations. In addition, DartAmericA transferred to Avalon all of the
accounts receivable outstanding for more than 60 days as of June 30, 2004. Such receivables amounted to approximately $.5 million, net of the allowance for doubtful accounts. Avalon collected the $.5 million in receivables subsequent to the sale.



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



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



The financial results of Avalons technical environmental engineering and
consulting business had been at a level lower than expected. The business began to experience losses and Avalon believed that the losses were likely to



18



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Avalon Holdings Corporation and Subsidiaries



continue in the future. Accordingly, in the fourth quarter of 2003, management determined that it was in
Avalons best interest to discontinue the operations of the engineering and consulting business. In January 2004, Avalon discontinued such operations and the results are included in discontinued operations.



Concurrent with the decision to discontinue the technical environmental engineering and
consulting business, Avalon decided to sell the building associated with the technical environmental services operations. As a result, the building is classified as held-for-sale and the expenses related to the maintenance and operations of the
building are included in discontinued operations.



Based upon quoted estimated
market prices, Avalon recorded a $.2 million write-down of the building in 2004 and a $1.6 million write-down of the building in 2003. Such write-downs are included in discontinued operations.



Note 6. Property and Equipment



Property and equipment at December 31, 2004 and 2003 consists of the following (in
thousands):



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2004 |        |   | 2003 |  
|Land and land improvements                     |  | $    | 10,341 |   |      | $ | 10,389 |  
|Buildings and improvements                     |  |      | 9,256  |   |      |   | 9,256  |  
|Machinery and equipment                        |  |      | 1,202  |   |      |   | 1,185  |  
|Vehicles                                       |  |      | 166    |   |      |   | 166    |  
|Office furniture and equipment                 |  |      | 1,139  |   |      |   | 1,125  |  
|Construction in progress                       |  |      | 162    |   |      |   | 26     |  
|                                               |  |      |        |   |      |   |        |  
|                                               |  |      | 22,266 |   |      |   | 22,147 |  
|                                               |  |     
|Less accumulated depreciation and amortization |  |      | (4,492 | ) |      |   | (3,755 | )
|                                               |  |      |        |   |      |   |        |  
|Property and equipment, net                    |  | $    | 17,774 |   |      | $ | 18,392 |  
|                                               |  |      |        |   |      |   |        |  



Leased property under
capital leases at December 31, 2004 and 2003 consists of the following (in thousands):



|                                          |  |      |       |      |   |    
|----------------------------------------- |  | ---- | ----- | ---- | - | ---
|                                          |  | 2004 |       | 2003
|Leased property under capital leases      |  | $    | 5,647 |      | $ | 474
|Accumulated amortization                  |  |      | 128   |      |   |   
|                                          |  |      |       |      |   |    
|Leased property under capital leases, net |  | $    | 5,519 |      | $ | 474
|                                          |  |      |       |      |   |    



Note 7. Income Taxes



Loss before income taxes for each of the three years in the period ended
December 31, 2004 was subject to taxation under United States jurisdictions only.



Total provisions (benefits) for income taxes consist of the following (in thousands):



|                        |  |      |   |      |   |     |      |  |   |    
|----------------------- |  | ---- | - | ---- | - | --- | ---- |  | - | ---
|                        |  | 2004 |   | 2003 |   |     | 2002
|Continuing operations   |  | $    |  |      | $ | 4   |      |  | $ | 10 
|Discontinued operations |  |      |  |      |   | (30 | )    |  |   | 529
|                        |  |      |   |      |   |     |      |  |   |    
|                        |  | $    |  |      | $ | (26 | )    |  | $ | 539
|                        |  |      |   |      |   |     |      |  |   |    



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



|          |  |      |   |      |   |      |  |   |   
|--------- |  | ---- | - | ---- | - | ---- |  | - | --
|          |  | 2004 |   | 2003 |   | 2002
|Current:  |  |      |   |      |   |      |  |   |   
|Federal   |  | $    |  |      | $ |     |  | $ |  
|State     |  |      |  |      |   | 4    |  |   | 10
|          |  |      |   |      |   |      |  |   |   
|          |  |      |  |      |   | 4    |  |   | 10
|          |  |      |   |      |   |      |  |   |   
|Deferred: |  |      |   |      |   |      |  |   |   
|Federal   |  |      |  |      |   |     |  |   |  
|State     |  |      |  |      |   |     |  |   |  
|          |  |      |   |      |   |      |  |   |   
|          |  |      |  |      |   |     |  |   |  
|          |  |      |   |      |   |      |  |   |   
|          |  | $    |  |      | $ | 4    |  | $ | 10
|          |  |      |   |      |   |      |  |   |   



The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2004 and 2003 are as follows (in thousands):



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                     |  | 2004 |        |   | 2003 |  
|Deferred tax assets:                                 |  |      |        |   |      |   |        |  
|Accounts receivable, allowance for doubtful accounts |  | $    | 201    |   |      | $ | 1,900  |  
|Reserves not deductible until paid                   |  |      | 173    |   |      |   | 243    |  
|Net operating loss carry-forwards                    |  |      |        |   |      |   |        |  
|Federal                                              |  |      | 2,000  |   |      |   | 2,533  |  
|State                                                |  |      | 456    |   |      |   | 808    |  
|Capital loss carry-forward                           |  |      | 2,903  |   |      |   |       |  
|Other                                                |  |      | 3      |   |      |   | 23     |  
|                                                     |  |      |        |   |      |   |        |  
|Gross deferred tax assets                            |  |      | 5,736  |   |      |   | 5,507  |  
|Less valuation allowance                             |  |      | (5,088 | ) |      |   | (4,050 | )
|                                                     |  |      |        |   |      |   |        |  
|Deferred tax assets net of valuation allowance       |  | $    | 648    |   |      | $ | 1,457  |  
|                                                     |  |      |        |   |      |   |        |  
|Deferred tax liabilities:                            |  |      |        |   |      |   |        |  
|Property and equipment                               |  | $    | (648   | ) |      | $ | (1,335 | )
|Other                                                |  |      |       |   |      |   | (122   | )
|                                                     |  |      |        |   |      |   |        |  
|Gross deferred tax liabilities                       |  | $    | (648   | ) |      | $ | (1,457 | )
|                                                     |  |      |        |   |      |   |        |  
|Net deferred tax asset                               |  | $    |       |   |      | $ |       |  
|                                                     |  |      |        |   |      |   |        |  



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 (loss) from continuing operations before income taxes as a result of the following differences (in thousands):



|                                                       |  |      |      |   |      |   |        |      |  |   |        |  
|------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                       |  | 2004 |      |   | 2003 |   |        | 2002 | 
|Loss before income taxes from continuing operations    |  | $    | (845 | ) |      | $ | (1,812 | )    |  | $ | (2,161 | )
|Federal statutory tax rate                             |  |      | 35   | % |      |   | 35     | %    |  |   | 35     | %
|                                                       |  |      |      |   |      |   |        |      |  |   |        |  
|                                                       |  |      | (296 | ) |      |   | (634   | )    |  |   | (756   | )
|State income taxes, net of federal income tax benefits |  |      |     |   |      |   | 1      |      |  |   | 7      |  
|Change in valuation allowance                          |  |      | 253  |   |      |   | 583    |      |  |   | 705    |  
|Other nondeductible expenses                           |  |      | 33   |   |      |   | 31     |      |  |   | 34     |  
|Other, net                                             |  |      | 10   |   |      |   | 23     |      |  |   | 20     |  
|                                                       |  |      |      |   |      |   |        |      |  |   |        |  
|                                                       |  | $    |     |   |      | $ | 4      |      |  | $ | 10     |  
|                                                       |  |      |      |   |      |   |        |      |  |   |        |  



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Avalon received net income tax refunds of $3,000 and $35,000 in 2004 and 2003, respectively. Avalon made net income
tax payments of $3,000 in 2002.



At December 31, 2004, Avalon has taxable loss
carryforwards for federal income tax purposes aggregating approximately $5,882,000, which are available to offset future federal taxable income. These carryforwards expire in 2020 through 2024. Avalon has a capital loss carryforward for federal
income tax purposes of approximately $8,538,000 which is available to offset future federal capital gain income. This carryforward expires in 2009. In addition, at December 31, 2004, certain subsidiaries of Avalon have net operating loss
carryforwards for state purposes aggregating to approximately $6,826,000, which are available to offset future state taxable income. These carryforwards expire at various dates through 2024. 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 8. 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 six 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 $79,000, $84,000 and $83,000 for the years 2004, 2003 and 2002, 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 9. 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 10. 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 of 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



20



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Avalon Holdings Corporation and Subsidiaries



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 11. 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 financial position or results of operations.



Note 12: Lease Commitments



Future commitments under long-term, operating leases and capital leases at December 31, 2004 are as follows (in thousands):



|                                                          |  |         |     |           |   |       |  |   |      
|--------------------------------------------------------- |  | ------- | --- | --------- | - | ----- |  | - | -----
|                                                          |  | Capital |     | Operating |   | Total
|2005                                                      |  | $       | 15  |           | $ | 341   |  | $ | 356  
|2006                                                      |  |         | 15  |           |   | 289   |  |   | 304  
|2007                                                      |  |         | 15  |           |   | 229   |  |   | 244  
|2008                                                      |  |         | 15  |           |   | 226   |  |   | 241  
|2009                                                      |  |         | 15  |           |   | 26    |  |   | 41   
|After 2009                                                |  |         | 645 |           |   | 0     |  |   | 645  
|                                                          |  |         |     |           |   |       |  |   |      
|Total minimum lease payments                              |  | $       | 720 |           | $ | 1,111 |  | $ | 1,831
|                                                          |  |         |     |           |   |       |  |   |      
|Less: Amounts representing interest                       |  |         | 485 |           |   |       |  |   |      
|                                                          |  |         |     |           |   |       |  |   |      
|Present value of minimum payments                         |  |         | 235 |           |   |       |  |   |      
|Less: Current portion of obligations under capital leases |  |         | 1   |           |   |       |  |   |      
|                                                          |  |         |     |           |   |       |  |   |      
|Long-term portion of obligations under capital leases     |  | $       | 234 |           |   |       |  |   |      
|                                                          |  |         |     |           |   |       |  |   |      



Rental expense included in the
Consolidated Statements of Operations amounted to $332,000 in 2004, $194,000 in 2003, and $145,000 in 2002.



Note 13. 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 two golf courses and related facilities and a travel agency. Avalon does not have significant operations located outside the United States and,
accordingly, geographical segment information is not presented.



In 2004, one
customer accounted for approximately 14% of the waste management services segments net operating revenues to external customers, and approximately 12% of Avalons consolidated net operating revenues. In 2003 and 2002, no customers
individually accounted for 10% or more of Avalons consolidated net operating revenues.



21



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Avalon Holdings Corporation and Subsidiaries



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):



|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                       |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Net operating revenues from:                           |  |      |         |   |      |   |         |      |  |   |         |  
|Waste management services:                             |  |      |         |   |      |   |         |      |  |   |         |  
|External customers revenues                            |  | $    | 25,493  |   |      | $ | 22,137  |      |  | $ | 22,100  |  
|Intersegment revenues                                  |  |      | 163     |   |      |   | 201     |      |  |   | 422     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total waste management services                        |  |      | 25,656  |   |      |   | 22,338  |      |  |   | 22,522  |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Golf and related operations:                           |  |      |         |   |      |   |         |      |  |   |         |  
|External customer revenues                             |  |      | 4,509   |   |      |   | 2,597   |      |  |   | 1,829   |  
|Intersegment revenues                                  |  |      | 38      |   |      |   | 78      |      |  |   | 88      |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total golf and related operations                      |  |      | 4,547   |   |      |   | 2,675   |      |  |   | 1,917   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Segment operating revenues                             |  |      | 30,203  |   |      |   | 25,013  |      |  |   | 24,439  |  
|Intersegment eliminations                              |  |      | (201    | ) |      |   | (279    | )    |  |   | (510    | )
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total net operating revenues                           |  | $    | 30,002  |   |      | $ | 24,734  |      |  | $ | 23,929  |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations before taxes: |  |      |         |   |      |   |         |      |  |   |         |  
|Waste management services                              |  | $    | 2,488   |   |      | $ | 1,512   |      |  | $ | 1,140   |  
|Golf and related operations                            |  |      | 24      |   |      |   | 66      |      |  |   | (303    | )
|Other businesses                                       |  |      |        |   |      |   | (13     | )    |  |   |        |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Segment income before taxes                            |  |      | 2,512   |   |      |   | 1,565   |      |  |   | 837     |  
|Corporate interest income                              |  |      | 92      |   |      |   | 154     |      |  |   | 209     |  
|Corporate other income, net                            |  |      | (7      | ) |      |   | 30      |      |  |   | 35      |  
|General corporate expenses                             |  |      | (3,442  | ) |      |   | (3,561  | )    |  |   | (3,242  | )
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Loss from continuing operations before taxes           |  | $    | (845    | ) |      | $ | (1,812  | )    |  | $ | (2,161  | )
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization:                         |  |      |         |   |      |   |         |      |  |   |         |  
|Waste management services                              |  | $    | 60      |   |      | $ | 84      |      |  | $ | 94      |  
|Golf and related operations                            |  |      | 650     |   |      |   | 524     |      |  |   | 473     |  
|Corporate                                              |  |      | 185     |   |      |   | 243     |      |  |   | 298     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 895     |   |      | $ | 851     |      |  | $ | 865     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|                                                       |  |      |        
|                                                       |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Interest income:                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Waste management services                              |  | $    | 92      |   |      | $ | 12      |      |  | $ | 16      |  
|Golf and related operations                            |  |      | 11      |   |      |   | 2       |      |  |   | 2       |  
|Corporate                                              |  |      | 92      |   |      |   | 154     |      |  |   | 209     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 195     |   |      | $ | 168     |      |  | $ | 227     |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Capital expenditures:                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Waste management services                              |  | $    | 18      |   |      | $ | 6       |      |  | $ | 42      |  
|Golf and related operations                            |  |      | 5,092   |   |      |   | 575     |      |  |   | 2,433   |  
|Corporate                                              |  |      | 44      |   |      |   | 26      |      |  |   | 13      |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 5,154   |   |      | $ | 607     |      |  | $ | 2,488   |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Identifiable assets at December 31:                    |  |      |         |   |      |   |         |      |  |   |         |  
|Waste management services                              |  | $    | 4,609   |   |      | $ | 5,821   |      |  | $ | 6,100   |  
|Golf and related operations                            |  |      | 19,574  |   |      |   | 14,825  |      |  |   | 14,376  |  
|Other businesses                                       |  |      | 731     |   |      |   | 557     |      |  |   | 566     |  
|Corporate                                              |  |      | 33,838  |   |      |   | 28,704  |      |  |   | 26,835  |  
|Discontinued operations                                |  |      | 4,128   |   |      |   | 15,589  |      |  |   | 19,458  |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Sub Total                                              |  |      | 62,880  |   |      |   | 65,496  |      |  |   | 67,335  |  
|Elimination of intersegment receivables                |  |      | (19,340 | ) |      |   | (16,442 | )    |  |   | (15,689 | )
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                  |  | $    | 43,540  |   |      | $ | 49,054  |      |  | $ | 51,646  |  
|                                                       |  |      |         |   |      |   |         |      |  |   |         |  



Note 14. Recently Issued Financial
Accounting Standards



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



22



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Avalon Holdings Corporation and Subsidiaries



Note 15. Quarterly financial data (Unaudited)



Selected quarterly financial data for each quarter in 2004 and 2003 is as follows (in thousands except for per share amounts):



|                                                               |  |                                         |        |   |                 |   |        |                |  |   |                |   |  |       |       |   |  |   |        |  
|-------------------------------------------------------------- |  | --------------------------------------- | ------ | - | --------------- | - | ------ | -------------- |  | - | -------------- | - |  | ----- | ----- | - |  | - | ------ | -
|                                                               |  | Year Ended December 31, 2004*, restated |       
|                                                               |  | First**Quarter                          |        |   | Second**Quarter |   |        | Third**Quarter |  |   | Fourth Quarter |   |  | Total |      
|Net operating revenues                                         |  | $                                       | 6,239  |   |                 | $ | 7,262  |                |  | $ | 8,448          |   |  | $     | 8,053 |   |  | $ | 30,002 |  
|Operating income (loss) from continuing operations             |  |                                         | (487   | ) |                 |   | (151   | )              |  |   | (609           | ) |  |       | 32    |   |  |   | (1,215 | )
|Income (loss) from continuing operations                       |  |                                         | (411   | ) |                 |   | (84    | )              |  |   | (463           | ) |  |       | 113   |   |  |   | (845   | )
|Income (loss) from discontinued operations                     |  |                                         | (614   | ) |                 |   | (2,414 | )              |  |   | 1,500          |   |  |       | (282  | ) |  |   | (1,810 | )
|Net income (loss)                                              |  |                                         | (1,025 | ) |                 |   | (2,498 | )              |  |   | 1,037          |   |  |       | (169  | ) |  |   | (2,655 | )
|Basic net income (loss) per share from continuing operations   |  |                                         | (.11   | ) |                 |   | (.02   | )              |  |   | (.13           | ) |  |       | .04   |   |  |   | (.22   | )
|Basic net income (loss) per share from discontinued operations |  |                                         | (.16   | ) |                 |   | (.64   | )              |  |   | .40            |   |  |       | (.08  | ) |  |   | (.48   | )
|Basic net income (loss) per share                              |  | $                                       | (.27   | ) |                 | $ | (.66   | )              |  | $ | .27            |   |  | $     | (.04  | ) |  | $ | (.70   | )



|                                                               |  |                                                   |        |   |               |   |        |              |  |   |       |  
|-------------------------------------------------------------- |  | ------------------------------------------------- | ------ | - | ------------- | - | ------ | ------------ |  | - | ----- | -
|                                                               |  | Year Ended December 31,2004*, previously reported |       
|                                                               |  | FirstQuarter                                      |        |   | SecondQuarter |   |        | ThirdQuarter | 
|Net operating revenues                                         |  | $                                                 | 6,239  |   |               | $ | 7,262  |              |  | $ | 8,448 |  
|Operating income (loss) from continuing operations             |  |                                                   | (524   | ) |               |   | (173   | )            |  |   | (592  | )
|Income (loss) from continuing operations                       |  |                                                   | (444   | ) |               |   | (103   | )            |  |   | (442  | )
|Income (loss) from discontinued operations                     |  |                                                   | (614   | ) |               |   | (2,414 | )            |  |   | 1,500 |  
|Net income (loss)                                              |  |                                                   | (1,058 | ) |               |   | (2,517 | )            |  |   | 1,058 |  
|Basic net income (loss) per share from continuing operations   |  |                                                   | (.12   | ) |               |   | (.02   | )            |  |   | (.12  | )
|Basic net income (loss) per share from discontinued operations |  |                                                   | (.16   | ) |               |   | (.64   | )            |  |   | .40   |  
|Basic net loss per share                                       |  | $                                                 | (.28   | ) |               | $ | (.66   | )            |  | $ | .28   |  



|                                                               |  |                               |       |   |                |   |       |               |  |   |                |   |  |       |        |   |  |   |        |  
|-------------------------------------------------------------- |  | ----------------------------- | ----- | - | -------------- | - | ----- | ------------- |  | - | -------------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                                               |  | Year Ended December 31, 2003* |      
|                                                               |  | First Quarter                 |       |   | Second Quarter |   |       | Third Quarter |  |   | Fourth Quarter |   |  | Total |       
|Net operating revenues                                         |  | $                             | 5,103 |   |                | $ | 7,213 |               |  | $ | 6,524          |   |  | $     | 5,894  |   |  | $ | 24,734 |  
|Operating loss from continuing operations                      |  |                               | (849  | ) |                |   | (462  | )             |  |   | (257           | ) |  |       | (621   | ) |  |   | (2,189 | )
|Loss from continuing operations                                |  |                               | (761  | ) |                |   | (384  | )             |  |   | (150           | ) |  |       | (521   | ) |  |   | (1,816 | )
|Income (loss) from discontinued operations                     |  |                               | (218  | ) |                |   | (3    | )             |  |   | 102            |   |  |       | (1,709 | ) |  |   | (1,828 | )
|Net loss                                                       |  |                               | (979  | ) |                |   | (387  | )             |  |   | (48            | ) |  |       | (2,230 | ) |  |   | (3,644 | )
|Basic net loss per share from continuing operations            |  |                               | (.20  | ) |                |   | (.10  | )             |  |   | (.04           | ) |  |       | (.14   | ) |  |   | (.48   | )
|Basic net income (loss) per share from discontinued operations |  |                               | (.06  | ) |                |   |      |               |  |   | .03            |   |  |       | (.45   | ) |  |   | (.48   | )
|Basic net loss per share                                       |  | $                             | (.26  | ) |                | $ | (.10  | )             |  | $ | (.01           | ) |  | $     | (.59   | ) |  | $ | (.96   | )

---

|* | The information in the above quarterly financial data for the first two quarters of the year
ended December 31, 2004 and for the year ended December 31, 2003 has been reclassified from the information previously reported in Avalons filings on Form 10Q and Form 10K to reflect discontinued operations.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | The information in the above quarterly financial data for the first three quarters of the year ended December 31, 2004 has been adjusted to reflect the
reclassification of the lease for the Squaw Creek facilities from an operating lease to a capital lease.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



---

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, 2004 and 2003, and the related consolidated statements of operations, shareholders equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2004. 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, 2004 and 2003, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



|                      
|----------------------
|Grant Thornton LLP    
|                      
|/s/ Grant Thornton LLP
|                      
|Cleveland, Ohio       
|February 18, 2005     



24



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Avalon Holdings Corporation and Subsidiaries



Digest of Financial Data



|                                                                                        |  |                                                                                             |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                                        |  | (All amounts are in thousands, except per share data, percentages and number of employees ) |       
|                                                                                        |  | 2004                                                                                        |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|SELECTED STATEMENT OF OPERATIONS INFORMATION                                            |  |                                                                                             |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net operating revenues                                                                  |  | $                                                                                           | 30,002 |   |      | $ | 24,734 |      |  | $ | 23,929 |   |  | $    | 25,178 |   |  | $ | 19,028 |  
|Operating loss from continuing operations                                               |  |                                                                                             | (1,215 | ) |      |   | (2,189 | )    |  |   | (2,536 | ) |  |      | (2,659 | ) |  |   | (3,093 | )
|Interest expense                                                                        |  |                                                                                             | 15     |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Loss from continuing operations                                                         |  |                                                                                             | (845   | ) |      |   | (1,816 | )    |  |   | (2,171 | ) |  |      | (956   | ) |  |   | (1,248 | )
|Loss from discontinued operations                                                       |  |                                                                                             | (1,810 | ) |      |   | (1,828 | )    |  |   | (3,667 | ) |  |      | (2,374 | ) |  |   | (1,185 | )
|Net loss                                                                                |  |                                                                                             | (2,655 | ) |      |   | (3,644 | )    |  |   | (5,838 | ) |  |      | (3,330 | ) |  |   | (2,433 | )
|Net loss per share from continuing operations                                           |  |                                                                                             | (.22   | ) |      |   | (.48   | )    |  |   | (.57   | ) |  |      | (.25   | ) |  |   | (.33   | )
|Net loss per share from discontinued operations                                         |  |                                                                                             | (.48   | ) |      |   | (.48   | )    |  |   | (.97   | ) |  |      | (.63   | ) |  |   | (.31   | )
|Net loss per share                                                                      |  |                                                                                             | (.70   | ) |      |   | (.96   | )    |  |   | (1.54  | ) |  |      | (.88   | ) |  |   | (.64   | )
|Dividends per Class A share                                                             |  |                                                                                             |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Dividends per Class B share                                                             |  |                                                                                             |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Weighted average shares used to calculate net income and pro forma net (loss) per share |  |                                                                                             | 3,803  |   |      |   | 3,803  |      |  |   | 3,803  |   |  |      | 3,803  |   |  |   | 3,803  |  
|                                                                                        |  |                                                                                             |        |   |     
|SELECTED CASH FLOW INFORMATION                                                          |  |                                                                                             |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net cash provided by (used in) operating activities from continuing operations          |  |                                                                                             | (1,199 | ) |      |   | 1,475  |      |  |   | (153   | ) |  |      | (1,062 | ) |  |   | (2,387 | )
|Cash used for capital expenditures                                                      |  |                                                                                             | 5,154  |   |      |   | 607    |      |  |   | 2,488  |   |  |      | 874    |   |  |   | 4,819  |  
|                                                                                        |  |                                                                                             |        |   |     
|SELECTED YEAR-END BALANCE SHEET
INFORMATION                                             |  |                                                                                             |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Cash and cash equivalents                                                               |  |                                                                                             | 7,861  |   |      |   | 3,224  |      |  |   | 1,190  |   |  |      | 2,290  |   |  |   | 8,953  |  
|Current assets                                                                          |  |                                                                                             | 16,871 |   |      |   | 17,329 |      |  |   | 22,666 |   |  |      | 25,135 |   |  |   | 30,952 |  
|Current liabilities                                                                     |  |                                                                                             | 7,026  |   |      |   | 10,134 |      |  |   | 8,881  |   |  |      | 10,748 |   |  |   | 9,223  |  
|Working capital                                                                         |  |                                                                                             | 9,845  |   |      |   | 7,195  |      |  |   | 13,785 |   |  |      | 14,387 |   |  |   | 21,729 |  
|Properties less accumulated depreciation and amortization                               |  |                                                                                             | 17,774 |   |      |   | 18,392 |      |  |   | 19,085 |   |  |      | 17,358 |   |  |   | 17,268 |  
|Leased property under capital leases, net                                               |  |                                                                                             | 5,519  |   |      |   | 474    |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total assets                                                                            |  |                                                                                             | 43,540 |   |      |   | 49,054 |      |  |   | 51,646 |   |  |      | 59,967 |   |  |   | 62,310 |  
|Current portion of obligation under capital leases                                      |  |                                                                                             | 1      |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Long-term obligations under capital leases                                              |  |                                                                                             | 234    |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Deferred income tax liability                                                           |  |                                                                                             |       |   |      |   |       |      |  |   |       |   |  |      | 701    |   |  |   | 1,239  |  
|Shareholders equity                                                                    |  |                                                                                             | 36,259 |   |      |   | 38,920 |      |  |   | 42,634 |   |  |      | 48,398 |   |  |   | 51,728 |  
|                                                                                        |  |                                                                                             |        |   |     
|OTHER INFORMATION                                                                       |  |                                                                                             |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Working capital ratio                                                                   |  |                                                                                             | 2.4:1  |   |      |   | 1.7:1  |      |  |   | 2.6:1  |   |  |      | 2.3:1  |   |  |   | 3.4:1  |  
|Quoted market price-Class A Shares:                                                     |  |                                                                                             |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|High                                                                                    |  |                                                                                             | 4.09   |   |      |   | 2.70   |      |  |   | 3.40   |   |  |      | 3.55   |   |  |   | 53/4   |  
|Low                                                                                     |  |                                                                                             | 2.43   |   |      |   | 1.70   |      |  |   | 1.96   |   |  |      | 2.20   |   |  |   | 25/16  |  
|Year-end                                                                                |  |                                                                                             | 3.16   |   |      |   | 2.63   |      |  |   | 2.00   |   |  |      | 2.85   |   |  |   | 23/4   |  
|Number of employees at year-end                                                         |  |                                                                                             | 120    |   |      |   | 321    |      |  |   | 346    |   |  |      | 422    |   |  |   | 450    |  

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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 Travel, Inc.

One American Way

Warren, Ohio 44484-5555

(330) 856-8400



26



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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 (Chairman)



Ted
Wesolowski

Shareholder, Babst, Calland, Clements, & Zomnir, P.C.

Executive Committee

Compensation Committee



Robert M. Arnoni

President,
Arnoni Development Company, Inc.

Compensation Committee

Audit Committee

Option Plan Committee



Stephen L. Gordon

Partner, Beveridge & Diamond, P.C.

Audit Committee

Option Plan Committee



Thomas C. Kniss

Partner, Kniss Kletzli & Associates, P.C.

Audit Committee (Chairman)

Option Plan Committee (Chairman)



Officers



Ronald E. Klingle

Chief Executive Officer



Frank Lamanna

Treasurer and Chief Financial Officer



Ted
Wesolowski

Secretary



Frances R. Klingle

Chief Administrative Officer



Kenneth R. Nichols

Vice President, Taxes



Richard Fees

Controller



27



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Avalon Holdings Corporation and Subsidiaries



Shareholder Information



Common stock information



Avalons Class A Common Stock is listed on the American Stock Exchange (symbol: AWX). Quarterly stock information for 2004, 2003 and 2002 as reported by The Wall
Street Journal is as follows:



|                    |  |      |  |      |  |      
|------------------- |  | ---- |  | ---- |  | -----
|2004: Quarter Ended |  | High |  | Low  |  | Close
|March 31            |  | 4.09 |  | 2.58 |  | 3.00 
|June 30             |  | 3.20 |  | 2.43 |  | 2.90 
|September 30        |  | 3.32 |  | 2.80 |  | 2.85 
|December 31         |  | 3.30 |  | 2.78 |  | 3.16 
|                    |  |      | 
|2003: Quarter Ended |  | High |  | Low  |  | Close
|March 31            |  | 2.06 |  | 1.70 |  | 1.89 
|June 30             |  | 2.12 |  | 1.70 |  | 2.06 
|September 30        |  | 2.39 |  | 2.05 |  | 2.38 
|December 31         |  | 2.70 |  | 2.22 |  | 2.63 
|                    |  |      | 
|2002: Quarter Ended |  | High |  | Low  |  | Close
|March 31            |  | 3.40 |  | 2.75 |  | 2.90 
|June 30             |  | 2.94 |  | 2.40 |  | 2.40 
|September 30        |  | 2.56 |  | 2.05 |  | 2.05 
|December 31         |  | 2.50 |  | 1.96 |  | 2.00 



No
dividends were paid during 2004.



There are 561 Class A and 11 Class B Common
Stock shareholders of record as of the close of business March 7, 2005. 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 Frank Lamanna, 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.



28