Exhibit 13.1

Avalon Holdings Corporation

2006 Annual Report

Financial Highlights

(in thousands, except for per share amounts)

For the year	2006		2005
Net operating revenues	$	39,329	$	34,157
Income from continuing operations		870		541
Income (loss) from discontinued operations		457		(151	)
Net income		1,327		390
Income per share from continuing operations		.23		.14
Income (loss) per share from discontinued operations		.12		(.04	)
Net income per share		.35		.10
At year-end	2006		2005
Working capital	$	13,714	$	11,630
Total assets		45,951		43,588
Shareholders’ equity		37,978		36,641

The Company

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

Contents

Financial Highlights	1
Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
Consolidated Balance Sheets	9
Consolidated Statements of Operations	10
Consolidated Statements of Cash Flows	11
Consolidated Statements of Shareholders’ Equity	12
Consolidated Statements of Comprehensive Income (Loss)	12
Notes to Consolidated Financial Statements	13
Report of Independent Registered Public Accounting Firm	22
Digest of Financial Data	23
Performance Graph	24
Company Location Directory	25
Directors and Officers	26
Shareholder Information	27

1

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 2006, Avalon utilized cash provided by operations and existing cash to fund capital expenditures and meet operating needs.

Avalon’s aggregate capital expenditures in 2006 were $2.1 million. Such expenditures related principally to the purchase of assets of the Sharon Country Club described below and construction costs to begin renovating the clubhouse and building additional banquet and recreational facilities at the Sharon Country Club. Avalon’s aggregate capital expenditures in 2007 are expected to be in the range of $5.5 million to $6.5 million, which will principally relate to additional renovation costs of the clubhouse and construction of the additional banquet and recreational facilities at the Sharon Country Club.

On November 1, 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations. Avalon has made $6.4 million of leasehold improvements as of December 31, 2006. 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.

On October 23, 2006, Avalon completed the acquisition of the Sharon Country Club assets for approximately $1 million in cash and the assumption of accounts receivable, certain leases and accounts payable. The primary assets of the Sharon Country Club include the golf course and clubhouse. Avalon intends to operate the Sharon Country Club facilities as part of its Avalon Golf and Country Club. Avalon is currently renovating the clubhouse and constructing additional banquet and recreational facilities. Such renovation and construction is expected to be completed in the second quarter of 2007.

Working capital was $13.7 million at December 31, 2006 compared with $11.6 million at December 31, 2005. The increase is primarily due to increased cash and cash equivalents and accounts receivable, partially offset by a decrease in short-term investments and an increase in accounts payable and other liabilities and accrued expenses.

The increase in cash and cash equivalents was primarily due to receiving approximately $1.8 million from the sale of the building in Export, Pennsylvania and investing the monies from short-term investments, which matured in the third quarter of 2006, in shorter term investments. As a result, such shorter term investments were classified as cash and cash equivalents instead of short-term investments.

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Avalon Holdings Corporation and Subsidiaries

The increase in accounts receivable of $2.1 million at December 31, 2006 compared with December 31, 2005 is primarily due to increased net operating revenues of the waste management services segment in the fourth quarter of 2006 compared with the fourth quarter of 2005.

The increase in accounts payable of $.9 million at December 31, 2006 compared with December 31, 2005 is primarily a result of an increase in payables due transportation and disposal facilities used by the waste brokerage and management services operations and payables relating to the construction at the Sharon Country Club. The increase in accounts payable relating to the waste brokerage and management operations is primarily due to higher net operating revenues of the waste brokerage and management operations in the fourth quarter of 2006 compared with the fourth quarter of 2005 and the timing of payments to disposal facilities and transporters in the ordinary course of business.

The increase in other liabilities and accrued expenses of $.4 million at December 31, 2006 compared with December 31, 2005 is primarily a result of an increase in unrecognized or deferred revenue from the increase in membership dues of the golf and related operations segment. Revenue related to membership dues is recognized proportionately over twelve months.

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, 2006, and the effect such obligations are expected to have on Avalon’s liquidity and cash flows in future periods.

	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 years
Operating lease obligations	$	782,000	$	338,000	$	444,000	$	—	$	—
Capital lease obligations		826,000		56,000		112,000		43,000		615,000
	$	1,608,000	$	394,000	$	556,000	$	43,000	$	615,000

Results of Operations

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

Performance in 2006 compared with 2005

Overall Performance

Net operating revenues increased to $39.3 million in 2006 compared with $34.2 million in 2005. The increase is primarily the result of higher net operating revenues of the waste management services segment and, to a lesser

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Avalon Holdings Corporation and Subsidiaries

extent, increased net operating revenues of the golf and related operations segment. Costs of operations increased to $33 million in 2006 compared with $28.5 million in 2005. The increase in costs of operations is primarily due to higher net operating revenues of the waste management services segment in which costs have a direct relationship to revenues. Consolidated selling, general and administrative expenses increased to $6.3 million in 2006 compared with $5.6 million in 2005. In 2005, selling, general and administrative expense included a decrease of approximately $.2 million in the provision for losses on accounts receivable. Avalon recorded income from continuing operations of $.9 million in 2006 compared with income from continuing operations of $.5 million in 2005.

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 $33.5 million in 2006 compared with $28.9 million in 2005. The increase in net operating revenues is primarily the result of an increase in the level of waste brokerage and management services provided. Income from continuing operations before taxes of the waste management services segment increased to $3.1 million in 2006 compared with $3.0 million in 2005 as a result of the increased level of business of the waste brokerage and management services. In 2005, income from continuing operations before taxes included a decrease of approximately $.2 million in the provision for losses on accounts receivable. Income from continuing operations before taxes of the captive landfill operations increased slightly in 2006 compared with 2005.

Net operating revenues of the golf and related operations segment were $5.9 million in 2006 compared with $5.3 million in 2005. The golf courses, which are located in Warren, Ohio and Vienna, Ohio, were unavailable for play during the first three months of 2006 and 2005 due to adverse weather conditions. Although the golf courses continue to be available to the general public, the primary source of revenues arise from members of the Avalon Golf and Country Club. The increase in net operating revenues is primarily due to an increase in the average number of members during 2006 compared with 2005 and increased merchandise, food and beverage sales. The golf and related operations segment incurred a loss from continuing operations before taxes of $.4 million in 2006 compared with a loss from continuing operations before taxes of $.3 million in 2005. The increased loss is primarily due to increased depreciation expense and increased employee and operating costs associated with operating the Squaw Creek facilities.

Interest Income

Interest income was $.6 million in 2006 compared with $.3 million in 2005. The increase is primarily the result of a higher amount of average cash invested during 2006 compared with 2005 and higher average investment rates.

General Corporate Expenses

General corporate expenses were $2.4 million in 2006 and 2005.

Net Income

Including net income from discontinued operations, Avalon recorded net income of $1.3 million in 2006 compared with net income of $.4 million in 2005. In 2006, Avalon’s income tax provision on income from continuing operations before income taxes was primarily offset by a change in its valuation allowance resulting in a small state tax provision. A valuation allowance has been provided to reduce the deferred tax assets as management believes it is more likely than not that the deferred tax assets will not be realized. Avalon’s income tax benefit on income from discontinued operations before income taxes was primarily a result of a determination that tax liabilities associated with the discontinued operations were no longer required.

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Avalon Holdings Corporation and Subsidiaries

Performance in 2005 compared with 2004

Overall Performance

Net operating revenues increased to $34.2 million in 2005 compared with $30.0 million in 2004. The increase is primarily the result of higher net operating revenues of the waste management services segment and, to a lesser extent, increased net operating revenues of the golf and related operations segment. Costs of operations increased to $28.5 million in 2005 compared with $24.8 million in 2004. The increase in costs of operations is primarily due to higher net operating revenues of the waste management services segment in which costs have a direct relationship to revenues. Consolidated selling, general and administrative expenses decreased to $5.6 million in 2005 compared with $6.4 million in 2004 primarily as a result of decreased employee costs and bonuses and a decrease in the provision for losses on accounts receivable. In 2004, consolidated selling, general and administrative expenses included approximately $.5 million of non-recurring bonuses. Avalon recorded income from continuing operations of $.5 million in 2005 compared with a loss from continuing operations of $.8 million in 2004.

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 $28.9 million in 2005 compared with $25.7 million in 2004. The increase in net operating revenues is primarily the result of an increase in the level of waste brokerage and management services provided. Income from continuing operations before taxes of the waste management services segment increased to $3.0 million in 2005 compared with $2.5 million in 2004 primarily as a result of the increased level of business of the waste brokerage and management services and a decrease in the provision for losses on accounts receivable. Income from continuing operations before taxes of the captive landfill operations were flat in 2005 compared with 2004.

Net operating revenues of the golf and related operations segment were $5.3 million in 2005 compared with $4.5 million in 2004. The golf courses were unavailable for play during the first three months of 2005 and 2004 due to adverse weather conditions. The increase in net operating revenues is primarily due to an increase in the average number of members during 2005 compared with 2004 and increased merchandise, food and beverage sales. The golf and related operations segment incurred a loss from continuing operations before taxes of $.3 million in 2005 compared with income from continuing operations before taxes of $24,000 in 2004. The decrease is primarily due to increased depreciation expense and increased employee and operating costs associated with operating the Squaw Creek facilities.

Interest Income

Interest income was $.3 million in 2005 compared with $.2 million in 2004. The increase is primarily the result of interest income earned in the first six months of 2005 on a promissory note issued to Avalon in connection with the sale of DartAmerica, Inc. in July 2004 and an increase in short-term investments in 2005 compared with the prior year.

General Corporate Expenses

General corporate expenses decreased to $2.4 million in 2005 compared with $3.4 million in 2004, primarily as a result of decreased employee costs and bonuses. In 2004, general corporate expenses included approximately $.5 million of non-recurring bonuses.

Net Income (Loss)

Including the losses from discontinued operations, Avalon recorded net income of $.4 million in 2005 compared with a net loss of $2.7 million in 2004. In 2005, Avalon’s income tax provision (benefit) on income from continuing operations before taxes was primarily offset by a change in its valuation allowance resulting in a small state tax provision. Although Avalon incurred a loss from continuing operations before taxes in 2004, Avalon did not record a tax benefit in 2004. This was primarily the result of Avalon recording a valuation allowance to reduce the deferred tax assets as management believes it is more likely than not that the deferred tax assets will not be realized.

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

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

Avalon’s waste disposal brokerage and management operations obtain and retain customers by providing services and identifying cost-efficient disposal options unique to a customer’s needs. Consolidation within the solid waste industry has resulted in reducing the number of disposal options available to waste generators and may cause disposal pricing to increase. In addition, 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.

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

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

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

The Avalon Golf and Country Club has a championship golf course and clubhouse at both the Avalon Lakes and Squaw Creek facilities. The Squaw Creek facility has a swimming pool, tennis courts, a fitness center and dining and banquet facilities. In addition, in October 2006, Avalon purchased the primary assets of the Sharon Country Club, which includes a golf course and clubhouse. Currently, Avalon is renovating the clubhouse and constructing additional banquet and recreational facilities. The Avalon Golf and Country Club competes with many public

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Avalon Holdings Corporation and Subsidiaries

courses and country clubs in the area. Although the golf courses continue to be available to the general public, the primary source of revenues is derived from the members of the Avalon Golf and Country Club. Avalon believes the combination of these three facilities will result in an increase in the number of members of the Avalon Golf and Country Club. Although there has been a substantial increase in the number of members, as of December 31, 2006, the Avalon Golf and Country Club has not attained its membership goals. There can be no assurance as to when such increased membership will be attained and when the golf and related operations will ultimately become profitable. Failure by Avalon to attain increased membership could adversely affect the future financial performance of Avalon.

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

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

Management is currently evaluating Avalon’s strategic direction for the future. While there are no specific transactions under negotiation or pending at this time, Avalon does not necessarily intend to limit itself, in the future, to the 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 from continuing operations before income taxes for the next fiscal year. Avalon currently has no debt outstanding and invests primarily in Certificates of Deposits, 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 inflation could be passed on to customers; however, Avalon may need to absorb all or a portion of these cost increases depending upon competitive conditions at the time.

Critical Accounting Policies

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

The majority of Avalon’s accounts receivable are due from industrial and commercial customers. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, Avalon’s previous accounts receivable loss history, the customer’s current ability to pay its obligation to Avalon, and the

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Avalon Holdings Corporation and Subsidiaries

condition of the general economy and the industry as a whole. Bankruptcy or economic challenges of a particular customer represent uncertainties that are not controllable by management. If management’s assessments change due to different assumptions or if actual collections differ from management’s estimates, future operating results could be impacted. Avalon writes off accounts receivable when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts, or to income, as appropriate under the circumstances.

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

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. Although Avalon is not currently aware of any environmental liability, there can be no assurance that in the future an environmental liability will not occur.

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

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Avalon Holdings Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except for share data)

	December 31,
	2006			2005
Assets
Current Assets:
Cash and cash equivalents	$	13,251		$	7,759
Short-term investments (Note 3)		—			4,433
Accounts receivable, less allowance for doubtful accounts of $340 in 2006 and $320 in 2005		7,672			5,639
Prepaid expenses		223			220
Other current assets		224			255
Current assets – discontinued operations (Note 5)		—			29
Total current assets		21,370			18,335
Property and equipment, net (Note 6)		18,696			17,571
Leased property under capital leases, net (Notes 4 and 6)		5,816			5,740
Other assets, net		69			61
Noncurrent assets – discontinued operations (Note 5)		—			1,881
Total assets	$	45,951		$	43,588
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of obligations under capital leases (Notes 4 and 12)	$	40		$	1
Accounts payable		4,723			3,837
Accrued payroll and other compensation		561			469
Accrued income taxes		24			145
Other accrued taxes		252			239
Other liabilities and accrued expenses (Notes 2 and 8)		2,056			1,623
Current liabilities – discontinued operations (Note 5)		—			391
Total current liabilities		7,656			6,705
Other noncurrent liabilities		—			9
Obligations under capital leases (Notes 4 and 12)		317			233
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 3,190,786 shares at December 31, 2006 and December 31, 2005		32			32
Class B Common Stock, $.01 par value, ten votes per share; authorized 1,000,000 shares; issued and outstanding 612,545 shares at December 31, 2006 and December 31, 2005		6			6
Paid-in capital		58,096			58,096
Accumulated deficit		(20,156	)		(21,483	)
Accumulated other comprehensive loss		—			(10	)
Total shareholders’ equity		37,978			36,641
Total liabilities and shareholders’ equity	$	45,951		$	43,588

See accompanying notes to consolidated financial statements.

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Avalon Holdings Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands, except for per share amounts)

	Year Ended December 31,
	2006			2005			2004
Net operating revenues	$	39,329		$	34,157		$	30,002
Costs and expenses:
Costs of operations		33,047			28,532			24,840
Selling, general and administrative expenses		6,271			5,577			6,377
Operating income (loss) from continuing operations		11			48			(1,215	)
Other income:
Interest expense		(15	)		(14	)		(15	)
Interest income		599			344			195
Other income, net		288			176			190
Income (loss) from continuing operations before income taxes		883			554			(845	)
Provision for income taxes (Note 7)		13			13			—
Income (loss) from continuing operations		870			541			(845	)
Discontinued Operations (Note 5):
Income from discontinued operations before income taxes1		362			(205	)		(1,810	)
Benefit for income taxes		(95	)		(54	)		—
Income (loss) from discontinued operations		457			(151	)		(1,810	)
Net income (loss)	$	1,327		$	390		$	(2,655	)
Income (loss) per share from continuing operations	$	.23		$	.14		$	(.22	)
Income (loss) per share from discontinued operations	$	.12		$	(.04	)	$	(.48	)
Net income (loss) per share (Note 2)	$	.35		$	.10		$	(.70	)
Weighted average shares outstanding (Note 2)		3,803			3,803			3,803

¹ Year ended December 31, 2005 includes a write-down of a building of $.5 million.

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.

See accompanying notes to consolidated financial statements.

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Avalon Holdings Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2006			2005			2004
Operating activities:
Income (loss) from continuing operations	$	870		$	541		$	(845	)
Reconciliation of income (loss) from continuing operations to cash provided by (used in) operating activities:
Depreciation		1,054			988			886
Amortization		1			1			1
Amortization of investments		(20	)		(4	)		8
Provision (benefit) for losses on accounts receivable		25			(249	)		107
Loss from disposal of property and equipment		3			4			—
Gain on sale of investments		—			—			(2	)
Change in operating assets and liabilities:
Accounts receivable		(2,058	)		(272	)		(1,786	)
Prepaid expenses		(3	)		35			1,193
Other current assets		31			(29	)		(8	)
Other assets		(9	)		(1	)		(801	)
Accounts payable		886			40			(238	)
Accrued payroll and other compensation		92			12			227
Accrued income taxes		(121	)		(38	)		(59	)
Other accrued taxes		13			29			(85	)
Other liabilities and accrued expenses		433			(6	)		182
Other noncurrent liabilities		(9	)		(12	)		21
Net cash provided by (used in) operating activities from continuing operations		1,188			1,039			(1,199	)
Net cash provided by operating activities from discontinued operations		95			1,411			2,241
Net cash provided by operating activities		1,283			2,450			1,042
Investing activities:
Purchases of investment securities		(94	)		(4,439	)		—
Maturities/sales of investment securities		4,557			1,600			4,399
Capital expenditures		(2,128	)		(1,015	)		(5,154	)
Proceeds from the sale of DartAmericA, Inc.		—			—			3,192
Payments received on note from the sale of facility		—			1,000			—
Proceeds from disposal of property and equipment		—			5			79
Net cash provided by (used in) investing activities from continuing operations		2,335			(2,849	)		2,516
Net cash provided by investing activities from discontinued operations		1,881			298			1,082
Net cash provided by (used in) investing activities		4,216			(2,551	)		3,598
Financing activities:
Principal payments on capital lease obligations		(7	)		(1	)		(3	)
Net cash used in financing activities from continuing operations		(7	)		(1	)		(3	)
Increase (decrease) in cash and cash equivalents		5,492			(102	)		4,637
Cash and cash equivalents at beginning of year		7,759			7,861			3,224
Cash and cash equivalents at end of year	$	13,251		$	7,759		$	7,861
Significant non-cash investing and financing activities:
Capital lease obligations incurred	$	130		$	—		$	238

For supplemental disclosures of cash flow information, see Note 4.

See accompanying notes to consolidated financial statements.

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Avalon Holdings Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(in thousands)

	For The Three Years Ended December 31, 2006
								Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (loss)			Total
	Shares			Common Stock
	Class A	Class B		Class A		Class B
Balance at January 1, 2004	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
Conversion of shares by shareholders (Note 10)	6	(6	)		—		—		—		—			—			—
Net income	—	—			—		—		—		390			—			390
Unrealized loss on investments	—	—			—		—		—		—			(8	)		(8	)
Balance at December 31, 2005	3,191	612		$	32	$	6	$	58,096	$	(21,483	)	$	(10	)	$	36,641
Net income	—	—			—		—		—		1,327			—			1,327
Unrealized gain on investments	—	—			—		—		—		—			10			10
Balance at December 31, 2006	3,191	612		$	32	$	6	$	58,096	$	(20,156	)	$	—		$	37,978

Consolidated Statements of Comprehensive Income(Loss)

(in thousands)

	Year Ended December 31,
	2006		2005			2004
Net income (loss)	$	1,327	$	390		$	(2,655	)
Unrealized gain (loss)on investments		10		(8	)		(6	)
Comprehensive income (loss)	$	1,337	$	382		$	(2,661	)

See accompanying notes to consolidated financial statements.

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Avalon Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Description of the Business

Avalon Holdings Corporation (“Avalon”) was formed on April 30, 1998 as a subsidiary of American Waste Services, Inc. (“AWS”). Pursuant to the terms of a Contribution and Distribution Agreement dated as of May 7, 1998 between Avalon and AWS, AWS contributed to Avalon its transportation operations, technical environmental services operations, waste disposal brokerage and management operations, and golf course and related operations, together with certain other assets including the headquarters of AWS and certain accounts receivable. In connection with the contribution, Avalon also assumed certain liabilities of AWS. On June 17, 1998, AWS distributed, as a special dividend, all of the outstanding shares of capital stock of Avalon to the holders of AWS common stock on a pro rata and corresponding basis.

In 2002, Avalon sold all of the fixed assets of its analytical laboratory business and in January 2004, Avalon sold all of the fixed assets of the remediation services business and discontinued the operations of the engineering and consulting services business. As such, the technical environmental services segment has been eliminated and the results of these operations are included in discontinued operations. All financial information presented has been restated to reflect this change. The captive landfill management operations, which were previously included in the technical environmental services segment, have been combined with the waste disposal brokerage and management services segment to form the waste management services segment.

In July 2004, Avalon sold 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 and the results of the transportation operations are included in discontinued operations. All financial information presented has been restated to reflect this change.

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

On November 1, 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon.

On October 23, 2006, Avalon completed the acquisition of the Sharon Country Club assets for approximately $1 million in cash and the assumption of accounts receivable, certain leases and accounts payable. The primary assets of the Sharon Country Club include the golf course and clubhouse. Avalon intends to operate the Sharon Country Club facilities as part of its Avalon Golf and Country Club.

Note 2. Summary of Significant Accounting Policies

The significant accounting policies of Avalon, which are summarized below, are consistent with generally accepted accounting principles and reflect practices appropriate to the businesses in which they operate. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates. Certain prior year amounts have been reclassified to be consistent with the 2006 presentation.

Principles of consolidation

The consolidated financial statements include the accounts of Avalon and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and cash equivalents

Cash and cash equivalents include money market instruments and other highly liquid short-term investments that are stated at cost, which approximates market value. Such investments, with original maturities of three months or less from date of purchase, are considered to be cash equivalents for purposes of the Consolidated Statements of Cash Flows and Consolidated Balance Sheets. Such investments were not insured by the Federal Deposit Insurance Corporation. The balance of such cash equivalents was $13.3 million and $7.7 million at December 31, 2006 and 2005, respectively.

Avalon maintains its cash balances in several financial institutions. These balances may, at times, exceed federal insured limits. Avalon has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk relating to its cash and cash equivalents.

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Avalon Holdings Corporation and Subsidiaries

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).

Financial instruments

The fair value of financial instruments consisting of cash, cash equivalents, accounts receivable, and accounts payable at December 31, 2006 and 2005 approximates carrying value due to the relative short maturity of these financial instruments. At December 31, 2006, Avalon did not have any available-for-sale securities. The fair value of available-for-sale investments, based upon market quotes, was $4.4 million at December 31, 2005.

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 management believes 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. Revenues for the golf operations are recognized as services are provided with the exception of membership dues which are recognized proportionately over twelve months. The deferred revenues relating to membership dues at December 31, 2006 and December 31, 2005 were $1.7 million and $1.2 million, respectively, and are included in the Consolidated Balance Sheets under the caption “Other liabilities and accrued expenses”.

Accounts Receivable

The majority of Avalon’s accounts receivable are due from industrial and commercial customers. Credit is extended based on an evaluation of a customer’s financial condition and, generally collateral is not required. Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. Avalon determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, Avalon’s previous accounts receivable loss history, the customer’s current ability to pay its obligation to Avalon, 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.

Leases

Avalon accounts for its lease agreements pursuant to Statement of Financial Accounting Standards (SFAS) No. 13, “Accounting for Leases”, which categorizes leases at their inception as either operating or capital leases depending on certain defined criteria. Leasehold improvements are capitalized at cost and are amortized over the lesser of their expected useful life or the life of the lease (See Notes 4, 6 and 12).

Asset impairments

Effective January 1, 2002, Avalon adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets.” In accordance with this statement, Avalon

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Avalon Holdings Corporation and Subsidiaries

reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If indicators of impairment exist, Avalon would determine whether the estimated undiscounted sum of the future cash flows of such assets 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.

Environmental liabilities

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

Basic net income (loss) per share

For the years ended December 31, 2006, 2005 and 2004, 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. Investment Securities

At December 31, 2006, Avalon did not have any available-for-sale securities. At December 31, 2005, Avalon held available-for-sale securities of $4,433,000 and such securities are included in the Consolidated Balance Sheets under the caption “Short-term investments”. As a result of the classification of securities as available-for-sale, Avalon recognized unrealized gains of $10,000, net of applicable taxes, for the year ended December 31, 2006 and unrealized losses of $8,000 and $6,000, net of applicable income taxes, for the years ended December 31, 2005 and 2004, respectively.

Accumulated other comprehensive loss was -0- at December 31, 2006 and an unrealized loss of $10,000 at December 31, 2005.

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

	December 31, 2005
	Amortized Cost		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale:
U.S. Treasury Notes	$	1,397	$	(10	)	$	1,387
Certificates of Deposit		3,046		—			3,046
Total	$	4,443	$	(10	)	$	4,433

Note 4. Capital Leased Assets

On November 1, 2003, Avalon entered into a long-term agreement with Squaw Creek Country Club to lease and operate its golf course and related facilities. The lease has an initial term of ten (10) years with four (4) consecutive ten (10) year renewal term options unilaterally exercisable by Avalon. Under the lease, Avalon is obligated to pay $15,000 in annual rent and make leasehold improvements of $150,000 per year. Amounts expended by Avalon for leasehold improvements during a given year in excess of $150,000 will be carried forward and applied to future leasehold improvement obligations. Avalon has made $6.4 million of leasehold improvements as of December 31, 2006. Based upon the amount of leasehold improvements already made and leasehold improvements anticipated to be made in the future, Avalon expects to exercise all its renewal options.

As a result of the purchase of assets of the Sharon Country Club and the assumption of certain liabilities in October 2006, Avalon recorded capital leases of $130,000 relating to the rental of golf carts.

Note 5. Discontinued Operations

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

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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. The monies were received in February 2005 and are included in the Consolidated Statements of Cash Flows under the caption “Net cash provided by operating activities from discontinued operations” for the year ended December 31, 2005. In the second quarter of 2006, Avalon determined that the remediation business was no longer obligated to pay the remaining accounts payable associated with this project. Therefore, Avalon wrote off approximately $.4 million of accounts payable and such amount is included in discontinued operations in the Consolidated Statements of Operations for the year ended December 31, 2006.

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 because the business began to experience losses and Avalon believed that the losses were likely to continue in the future. 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 was classified as held-for-sale and the expenses related to the maintenance and operations of the building were included in discontinued operations. Based upon quoted market prices, in the fourth quarter of 2003, Avalon recorded a $1.6 million write-down of the building, a $.2 million write-down of the building in the fourth quarter of 2004 and a $.2 million write-down of the building in the second quarter of 2005 and a $.3 million write-down of the building in the third quarter of 2005. Avalon sold the building in the second quarter of 2006 and received $1.8 million which represented the selling price less costs to sell the building. Avalon incurred a loss of approximately $20,000 on the sale of the building. Such loss and write-downs have been included in discontinued operations in their respective years.

On July 15, 2004, Avalon completed the sale of DartAmericA, Inc. (“DartAmericA”) for a selling price of approximately $4.2 million. At the closing, BMC International, Inc. (“BMC”) delivered to Avalon $3 million in cash and a secured promissory note of $1 million payable in 6 monthly installments of interest only and 54 equal monthly installments of $21,583 commencing February 15, 2005. The balance of the selling price, $.2 million, was based upon changes in certain of DartAmericA’s balance sheet items from March 31, 2004 to June 30, 2004 and was paid in September 2004. On June 30, 2005, BMC paid Avalon the remaining balance of the promissory note which amounted to approximately $.9 million and is included in the Consolidated Statements of Cash Flows under the caption “Payments received on note for sale of facility” for the year ended December 31, 2005. The results of operations of the transportation operations have been included in discontinued operations.

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

Note 6. Property and Equipment

Property and equipment at December 31, 2006 and 2005 consists of the following (in thousands):

	2006			2005
Land and land improvements	$	10,905		$	10,341
Buildings and improvements		9,747			9,428
Machinery and equipment		1,275			1,214
Vehicles		123			123
Office furniture and equipment		1,684			1,510
Construction in progress		816			94
		24,550			22,710
Less: accumulated depreciation and amortization		(5,854	)		(5,139	)
Property and equipment, net	$	18,696		$	17,571
Leased property under capital leases at December 31, 2006 and 2005 consists of the following (in thousands):
	2006			2005
Leased property under capital leases	$	6,514		$	6,125
Less: accumulated amortization		(698	)		(385	)
Leased property under capital leases, net	$	5,816		$	5,740

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Avalon Holdings Corporation and Subsidiaries

Note 7. Income Taxes

Income (loss) before income taxes for each of the three years in the period ended December 31, 2006 was subject to taxation under United States jurisdictions only.

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

	2006			2005			2004
Continuing operations	$	13		$	13		$	—
Discontinued operations		(95	)		(54	)		—
	$	(82	)	$	(41	)	$	—
The provision (benefit) for income taxes from continuing operations consists of the following (in thousands):
	2006			2005			2004
Current:
Federal	$	—		$	—		$	—
State		13			13			—
		13			13			—
Deferred:
Federal		—			—			—
State		—			—			—
		—			—			—
	$	13		$	13		$	—

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2006 and 2005 are as follows (in thousands):

	2006			2005
Deferred tax assets:
Accounts receivable, allowance for doubtful accounts	$	122		$	113
Reserves not deductible until paid		171			148
Net operating loss carry-forwards
Federal		2,113			1,970
State		394			448
Capital loss carry-forward		2,851			2,851
Other		5			5
Gross deferred tax assets		5,656			5,535
Less valuation allowance		(4,462	)		(4,959	)
Deferred tax assets net of valuation allowance	$	1,194		$	576
Deferred tax liabilities:
Property and equipment	$	(1,194	)	$	(576	)
Other		—			—
Gross deferred tax liabilities	$	(1,194	)	$	(576	)
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):

	2006			2005			2004
Income (loss) before income taxes from continuing operations	$	883		$	554		$	(845	)
Federal statutory tax rate		35	%		35	%		35	%
		309			194			(296	)
State income taxes, net of federal income tax benefits		8			8			—
Change in valuation allowance		(333	)		(210	)		253
Other nondeductible expenses		32			25			33
Other, net		(3	)		(4	)		10
	$	13		$	13		$	—

Avalon made net income tax payments of $38,000 in 2006 and received net income tax refunds of $4,000 and $3,000 in 2005 and 2004, respectively.

At December 31, 2006, Avalon has taxable loss carryforwards for federal income tax purposes aggregating approximately $6,214,000 which are available to offset future federal taxable income. These carryforwards expire in 2020 through 2026. Avalon has a capital loss carryforward for federal income tax purposes of approximately $8,385,000 which is available to offset future federal capital gain income. This carryforward expires in 2009. In addition, at December 31, 2006, certain subsidiaries of Avalon have net operating loss carryforwards for state purposes which are available to offset future state taxable income. These carryforwards expire at various dates through 2026. 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 $100,000, $91,000 and $79,000 for the years 2006, 2005 and 2004, 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.”

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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 to the shareholders. However, with regard to the election of directors, for as long as the outstanding Class B Common Stock has more than 50% of the total outstanding voting power of all common stock, the holders of the Class A Common Stock, voting as a separate class, will elect the number of directors equal to at least 25% of the total Board of Directors and the holders of the Class B Common Stock, voting as a separate class, will elect the remaining directors. Thereafter, the holders of the Class A Common Stock (one vote per share) and Class B Common Stock (ten votes per share) will vote together as a single class for the election of directors. The holders of a majority of all outstanding shares of Class A Common Stock or Class B Common Stock, voting as separate classes, must also approve amendments to the Articles of Incorporation that adversely affect the shares of their class. Shares of Class A Common Stock and Class B Common Stock do not have cumulative voting rights.

Each share of Class B Common Stock is convertible, at any time, at the option of the shareholder, into one share of Class A Common Stock. Shares of Class B Common Stock are also automatically converted into shares of Class A Common Stock on the transfer of such shares to any person other than Avalon, another holder of Class B Common Stock or a Permitted Transferee, as defined in Avalon’s Articles of Incorporation. The Class A Common Stock is not convertible.

Note 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, 2006 are as follows (in thousands):

	Capital		Operating		Total
2007	$	56	$	338	$	394
2008		56		333		389
2009		56		111		167
2010		28		0		28
2011		15		0		15
After 2011		615		0		615
Total minimum lease payments	$	826	$	782	$	1,608
Less: Amounts representing interest		469
Present value of minimum payments		357
Less: Current portion of obligations under capital leases		40
Long-term portion of obligations under capital leases	$	317

Rental expense included in the Consolidated Statements of Operations amounted to $344,000 in 2006, $350,000 in 2005 and $332,000 in 2004.

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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 golf courses and related facilities and a travel agency. Revenue for the golf and related operations segment consists primarily of membership dues, greens fees, cart rentals, merchandise, food and beverage sales. Avalon does not have significant operations located outside the United States and, accordingly, geographical segment information is not presented.

In 2006, no customer individually accounted for 10% or more of Avalon’s consolidated net operating revenues. In 2005, one customer and its affiliates accounted for approximately 11% of the waste management services segment’s net operating revenues to external customers and approximately 9% of Avalon’s consolidated net operating revenues. 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.

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):

	2006			2005			2004
Net operating revenues from:
Waste management services: External customers revenues	$	33,458		$	28,864		$	25,493
Intersegment revenues		—			4			163
Total waste management services		33,458			28,868			25,656
Golf and related operations:
External customer revenues		5,871			5,293			4,509
Intersegment revenues		54			45			38
Total golf and related operations		5,925			5,338			4,547
Segment operating revenues		39,383			34,206			30,203
Intersegment eliminations		(54	)		(49	)		(201	)
Total net operating revenues	$	39,329		$	34,157		$	30,002
Income (loss) from continuing operations before taxes:
Waste management services	$	3,112		$	3,001		$	2,488
Golf and related operations		(388	)		(303	)		24
Other businesses		—			(5	)		—
Segment income before taxes		2,724			2,693			2,512
Corporate interest income		501			251			92
Corporate other income, net		84			43			(7	)
General corporate expenses		(2,426	)		(2,433	)		(3,442	)
Income (loss) from continuing operations before taxes	$	883		$	554		$	(845	)
Depreciation and amortization:
Waste management services	$	24		$	30		$	60
Golf and related operations		890			800			650
Corporate		121			155			185
Total	$	1,035		$	985		$	895
Interest income:
Waste management services	$	87		$	82		$	92
Golf and related operations		11			11			11
Corporate		501			251			92
Total	$	599		$	344		$	195
Capital expenditures:
Waste management services	$	53		$	17		$	18
Golf and related operations		2,037			913			5,092
Corporate		38			85			44
Total	$	2,128		$	1,015		$	5,154
Identifiable assets at December 31:
Waste management services	$	8,082		$	6,165		$	4,609
Golf and related operations		21,188			19,822			19,574
Other businesses		—			828			731
Corporate		37,587			33,369			33,838
Discontinued operations		—			1,909			4,128
Sub Total		66,857			62,093			62,880
Elimination of intersegment receivables		(20,906	)		(18,505	)		(19,340	)
Total	$	45,951		$	43,588		$	43,540

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Avalon Holdings Corporation and Subsidiaries

The increase of $1.9 million in identifiable assets of the waste management services segment is primarily as a result of an increase in accounts receivable. The increase in identifiable assets of the golf and related operations segment is primarily a result of capital expenditures. The increase of $4.2 million in corporate identifiable assets is principally related to an increase in cash and cash equivalents and an increase in intersegment transactions which are eliminated in consolidation.

Note 14. Recently Issued Financial Accounting Standards

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FIN No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires recognition of tax benefits that satisfy a greater than 50% probability threshold. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for Avalon beginning January 1, 2007. Avalon is currently assessing the potential impact that the adoption of FIN No. 48 will have on its financial statements.

In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements. The provisions of SAB 108 are effective for the annual period ending after November 15, 2006. Avalon does not believe the adoption of SAB 108 will have a material impact on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for Avalon beginning January 1, 2008. Avalon is currently assessing the potential impact that the adoption of SFAS No. 157 will have on its financial statements.

20

Avalon Holdings Corporation and Subsidiaries

Note 15. Quarterly financial data (Unaudited)

Selected quarterly financial data for each quarter in 2006 and 2005 is as follows (in thousands, except for per share amounts):

	Year Ended December 31, 2006
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net operating revenues	$	8,924		$	9,230		$	11,130		$	10,045		$	39,329
Operating (loss) income from continuing operations		(163	)		(97	)		286			(15	)		11
Income from continuing operations		9			110			503			248			870
Income (loss) from discontinued operations		(7	)		371			(2	)		95			457
Net income		2			481			501			343			1,327
Basic income per share from continuing operations		—			.03			.13			.07			.23
Basic income per share from discontinued operations		—			.10			—			.02			.12
Basic net income per share	$	—		$	.13		$	.13		$	.09		$	.35

	Year Ended December 31, 2005
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter		Total
Net operating revenues	$	7,430		$	8,739		$	9,517		$	8,471	$	34,157
Operating (loss) income from continuing operations		(76	)		(174	)		216			82		48
Income (loss) from continuing operations		32			(65	)		356			218		541
Income (loss) from discontinued operations		80			(10	)		(336	)		115		(151	)
Net income (loss)		112			(75	)		20			333		390
Basic income (loss) per share from continuing operations		.01			(.02	)		.09			.06		.14
Basic income (loss) per share from discontinued operations		.02			—			(.09	)		.03		(.04	)
Basic net income (loss) per share	$	.03		$	(.02	)	$	—		$	.09	$	.10

21

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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Grant Thornton LLP

/s/ Grant Thornton LLP

Cleveland, Ohio

February 9, 2007

22

Avalon Holdings Corporation and Subsidiaries

Digest of Financial Data

	(All amounts are in thousands, except per share data, percentages and number of employees )
	2006		2005			2004			2003			2002
SELECTED STATEMENT OF OPERATIONS INFORMATION
Net operating revenues	$	39,329	$	34,157		$	30,002		$	24,734		$	23,929
Operating income (loss) from continuing operations		11		48			(1,215	)		(2,189	)		(2,536	)
Interest expense		15		14			15			—			—
Income (loss) from continuing operations		870		541			(845	)		(1,816	)		(2,171	)
Income (loss) from discontinued operations		457		(151	)		(1,810	)		(1,828	)		(3,667	)
Net income (loss)		1,327		390			(2,655	)		(3,644	)		(5,838	)
Income (loss) per share from continuing operations		.23		.14			(.22	)		(.48	)		(.57	)
Income (loss) per share from discontinued operations		.12		(.04	)		(.48	)		(.48	)		(.97	)
Net income (loss) per share		.35		.10			(.70	)		(.96	)		(1.54	)
Dividends per Class A share	$	—	$	—		$	—		$	—		$	—
Dividends per Class B share	$	—	$	—		$	—		$	—		$	—
Weighted average shares used to calculate net income (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	$	1,188	$	1,039		$	(1,199	)	$	1,475		$	(153	)
Cash used for capital expenditures	$	2,128	$	1,015		$	5,154		$	607		$	2,488
SELECTED YEAR-END BALANCE SHEET INFORMATION
Cash and cash equivalents	$	13,251	$	7,759		$	7,861		$	3,224		$	1,190
Current assets		21,370		18,335			16,871			17,329			22,666
Current liabilities		7,656		6,705			7,026			10,134			8,881
Working capital		13,714		11,630			9,845			7,195			13,785
Properties less accumulated depreciation and amortization		18,696		17,571			17,774			18,392			19,085
Leased property under capital leases, net		5,816		5,740			5,519			474			—
Total assets		45,951		43,588			43,540			49,054			51,646
Current portion of obligations under capital leases		40		1			1			—			—
Long-term obligations under capital leases		317		233			234			—			—
Deferred income tax liability		—		—			—			—			—
Shareholders’ equity	$	37,978	$	36,641		$	36,259		$	38,920		$	42,634
OTHER INFORMATION
Working capital ratio		2.8:1		2.7:1			2.4:1			1.7:1			2.6:1
Quoted market price-Class A Shares:
High	$	8.15	$	5.35		$	4.09		$	2.70		$	3.40
Low	$	4.20	$	2.99		$	2.43		$	1.70		$	1.96
Year-end	$	7.20	$	4.68		$	3.16		$	2.63		$	2.00
Number of employees at year-end		152		143			120			321			346

23

Avalon Holdings Corporation and Subsidiaries

Performance Graph

The following line graph compares the yearly percentage change in the Company’s cumulative total shareholder return on its Class A Common Stock for the year 2002, 2003, 2004, 2005 and 2006 with the cumulative total return of both the Amex Market Value Index and the Russell 2000 Index.

	December 31, 2001		December 31, 2002		December 31, 2003		December 31, 2004		December 31, 2005		December 31, 2006
Avalon Holdings Corporation
Class A Common Stock	$	100.00	$	70.18	$	92.28	$	110.88	$	164.21	$	252.63
Amex Market Value Index	$	100.00	$	100.08	$	144.57	$	178.46	$	220.35	$	262.17
Russell 2000 Index	$	100.00	$	79.52	$	117.07	$	138.55	$	144.86	$	171.47

24

Avalon Holdings Corporation and Subsidiaries

Company Location Directory

Corporate Office

Avalon Holdings Corporation

One American Way

Warren, Ohio 44484-5555

(330) 856-8800

Waste Management Services

American Waste Management Services, Inc.

One American Way

Warren, Ohio 44484-5555

(330) 856-8800

American Landfill Management, Inc.

One American Way

Warren, Ohio 44484-5555

(330) 856-8800

American Construction Supply, Inc.

One American Way

Warren, Ohio 44484-5555

(330) 856-8800

Golf and Related Operations

Avalon Golf and Country Club

One American Way

Warren, Ohio 44484-5555

(330) 856-8898

Avalon Lakes Golf Course

One American Way

Warren, Ohio 44484-5555

(330) 856-8898

Squaw Creek Golf Course

761 Youngstown-Kingsville Road

Vienna, Ohio 44473

(330) 539-5103

Avalon Country Club at Sharon, Inc.

1030 Forker Blvd.

Hermitage, PA 16148-1566

(724) 981-6700

Avalon Travel, Inc.

One American Way

Warren, Ohio 44484-5555

(330) 856-8400

25

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.

Executive Committee

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

Timothy C. Coxson

Treasurer, Chief Financial Officer and Assistant Secretary

Ted Wesolowski

Secretary

Frances R. Klingle

Chief Administrative Officer

Kenneth R. Nichols

Vice President, Taxes

Richard R. Fees

Controller

26

Shareholder

Information

Common stock information

Avalon’s Class A Common Stock is listed on the American Stock Exchange (symbol: AWX). Quarterly stock information for 2006, 2005 and 2004 as reported by The Wall Street Journal is as follows:

2006:
Quarter Ended	High		Low		Close
March 31	$	5.40	$	4.20	$	4.95
June 30		5.25		4.35		5.02
September 30		5.60		4.75		5.50
December 31		8.15		5.40		7.20

2005:
Quarter Ended	High		Low		Close
March 31	$	3.54	$	2.99	$	3.45
June 30		5.35		3.10		4.01
September 30		4.40		3.89		4.24
December 31		4.75		3.80		4.68

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

No dividends were paid during 2006.

There are 512 Class A and 11 Class B Common Stock shareholders of record as of the close of business March 2, 2007. The number of holders is based upon the actual holders registered on the records of Avalon’s transfer agent and registrar and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

Dividend policy

Avalon presently intends to retain earnings for use in the operation and expansion of its business and therefore, does not anticipate paying any cash dividends in the foreseeable future.

Annual report on Form 10-K

Copies of Avalon’s annual report on Form 10-K can be obtained free of charge by writing to Avalon Holdings Corporation, One American Way, Warren, Ohio 44484-5555, Attention: Shareholder Relations or by visiting Avalon’s web-site at www.avalonholdings.com.

Transfer agent and registrar

The transfer agent and registrar for Avalon is American Stock Transfer and Trust Company. All correspondence concerning stock transfers should be directed to them at 59 Maiden Lane, New York, New York 10038.

Investor inquiries

Security analysts, institutional investors, shareholders, news media representatives and others seeking financial information or general information about Avalon are invited to direct their inquiries to Timothy C. Coxson, Treasurer and Chief Financial Officer, telephone (330) 856-8800.

Policy statement on equal employment opportunity and affirmative action

Avalon is firmly committed to a policy of equal employment opportunity and affirmative action. Toward this end, Avalon will continue to recruit, hire, train and promote persons in all job titles, without regard to race, color, religion, sex, national origin, age, handicap, ancestry or Vietnam-era or disabled veteran status. We will base all decisions on merit so as to further the principle of equal employment opportunity. This policy extends to promotions and to all actions regarding employment including compensation, benefits, transfers, layoffs, returns from layoff, company-sponsored training and social programs.

27