UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-QSB
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended March 31, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from  to
 Commission File No. 000-13597
 AVALON ENERGY CORPORATION
  Nevada
    
    88-0195105(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1288 Alberni Street, Suite 806Vancouver, British Columbia
    
    V6E 4N5 CANADA(Address of principal executive offices)
    
    (Zip Code)
 (604) 664-0499
  Not Applicable
  þ o
  Yes o
    
    No þ




AVALON ENERGY CORPORATION

(An Exploration Stage Company)

FINANCIAL STATEMENTS

MARCH 31, 2006

(UNAUDITED)



BALANCE SHEETS.......................................................F-1



STATEMENTS OF OPERATIONS............................F-2



STATEMENTS OF CASH FLOWS...........................F-3



NOTES TO FINANCIAL STATEMENTS................F-4



AVALON ENERGY CORPORATION

(An Exploration Stage Company)



BALANCE SHEETS



|                                                                                              |                            |                  
|--------------------------------------------------------------------------------------------- | -------------------------- | -----------------
|                                                                                              | March 31,
2006
(unaudited) | December 31,
2005
|                                                                                              |                            |                  
|ASSETS                                                                                       
|                                                                                              |                            |                  
|CURRENT ASSETS                                                                                |                            |                  
|Cash                                                                                          | $        31,938            | $        41,081  
|Taxes recoverable                                                                             | 1,773                      | 810              
|                                                                                              | 33,711                     | 41,891           
|                                                                                              |                            |                  
|AVAILABLE-FOR-SALE SECURITIES(Note 3)                                                         | 64,001                     | 30,001           
|DUE FROM GOLDEN SPIRIT GAMING LTD.(Note 7)                                                    | 140,846                    | 167,291          
|OIL AND GAS PROPERTIES,(full cost method of accounting, unproven) (Note 4)                    | 1,021,022                  | 1,015,759        
|                                                                                              |                            |                  
|                                                                                              | $  1,259,580               | $  1,254,942     
|                                                                                              |                            |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                         
|                                                                                              |                            |                  
|CURRENT LIABILITIES                                                                           |                            |                  
|Accounts payable and accrued liabilities                                                      | $     26,678               | $      14,616    
|Due to related parties (Note 7)                                                               | 96,280                     | 68,857           
|                                                                                              | 122,958                    | 83,473           
|                                                                                              |                            |                  
|                                                                                              |                            |                  
|                                                                                              |                            |                  
|                                                                                              |                            |                  
|STOCKHOLDERS EQUITY(Note 6)                                                                  |                            |                  
|Convertible Preferred:
-  Class A voting stock, $0.001 par value, 5,000,000 shares authorized |                            |                  
|-  Class B voting stock, $0.001 par value, 5,000,000 shares authorized                        |                            |                  
|Common stock, $.001 par value, 200,000,000 shares authorized                                  |                            |                  
|38,900,493 (December 31, 2005  38,400,493) shares issued and outstanding                     | 78,616                     | 78,116           
|Additional paid-in capital                                                                    | 22,222,099                 | 22,117,599       
|Deferred compensation (Note 5)                                                                | (54,417)                   | (68,290)         
|Deficit accumulated during the exploration stage                                              | (21,043,676)               | (20,855,956)     
|Accumulated other comprehensive loss (Note 3)                                                 | (66,000)                   | (100,000)        
|                                                                                              | 1,136,621                  | 1,171,469        
|                                                                                              |                            |                  
|                                                                                              | $    1,259,580             | $    1,254,942   



The accompanying notes are an integral part of these financial statements



AVALON ENERGY CORPORATION

(An Exploration Stage Company)



STATEMENTS OF OPERATIONS

(unaudited)



|                                                             |                                   |                                   |                                                                
|------------------------------------------------------------ | --------------------------------- | --------------------------------- | ---------------------------------------------------------------
|                                                             | Three months ended March 31, 2006 | Three months ended March 31, 2005 | Cumulative of operations from January 1, 1996 to March 31, 2006
|                                                             |                                   |                                   |                                                                
|                                                             |                                   |                                   |                                                                
|GENERAL AND ADMINISTRATIVE EXPENSES                          |                                   |                                   |                                                                
|Litigation settlement                                        | $                      -          | $                     -           | $2,291,070                                                     
|Management and consulting fees                               | 68,698                            | 319,161                           | 4,057,397                                                      
|Consulting fees  stock-based compensation (Note 6)          | 50,000                            | 250,560                           | 1,660,140                                                      
|Exploration costs                                            | -                                 | -                                 | 113,678                                                        
|Loss on settlement of debt                                   | -                                 | -                                 | 718,784                                                        
|General and administrative                                   | 35,256                            | 48,591                            | 2,267,393                                                      
|Professional fees                                            | 33,766                            | 14,867                            | 898,774                                                        
|Interest expense                                             | -                                 | -                                 | 98,282                                                         
|Software development costs                                   | -                                 | -                                 | 737,300                                                        
|                                                             |                                   |                                   |                                                                
|LOSS BEFORE THE FOLLOWING                                    | (187,720)                         | (633,179)                         | 12,842,818                                                     
|                                                             |                                   |                                   |                                                                
|Property option (income ) loss                               | -                                 | -                                 | (130,000)                                                      
|Write-down of investment in Legacy Mining Ltd.               | -                                 | -                                 | 128,288                                                        
|Write-down of interest in oil and gas properties             | -                                 | -                                 | 1,406,000                                                      
|Write-down of interest in ACGT Corporation                   | -                                 | -                                 | 2,250,937                                                      
|Loss on Iceberg Drive Inn Investment                         | -                                 | -                                 | 85,000                                                         
|                                                             |                                   |                                   |                                                                
|NET LOSS                                                     | $    (187,720)                    | $    (633,179)                    | ($16,583,043)                                                  
|BASIC AND DILUTED LOSS PER SHARE                             | $           (0.00)                | $             (0.02)              |                                                                
|                                                             |                                   |                                   |                                                                
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED | 38,726,336                        | 28,566,678                        |                                                                



The accompanying notes are an integral part of these financial statements



AVALON ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                            |                                   |                                   |                                                  
|--------------------------------------------------------------------------- | --------------------------------- | --------------------------------- | -------------------------------------------------
|                                                                            | Three months ended March 31, 2006 | Three months ended March 31, 2005 | Cumulative from January 1, 1996 to March 31, 2006
|                                                                            |                                   |                                   |                                                  
|CASH FLOWS FROM OPERATING ACTIVITIES                                        |                                   |                                   |                                                  
|Net loss                                                                    | $   (187,720)                     | $   (633,179)                     | $ (16,583,043)                                   
|Adjustments to reconcile net loss to net cash used in operating activities: |                                   |                                   |                                                  
|- fees and services                                                         | 13,873                            | 86,920                            | 3,144,587                                        
|- stock-based compensation                                                  | 50,000                            | 250,560                           | 1,660,140                                        
|- interest paid for with common shares                                      | -                                 | -                                 | 80,872                                           
|- loss on settlement of debt                                                | -                                 | -                                 | 718,784                                          
|- common shares software development costs                                  | -                                 | -                                 | 600,000                                          
|- common shares used for exploration costs paid by shares                   | -                                 | -                                 | 110,000                                          
|- write-down of interest in oil and gas properties                          | -                                 | -                                 | 2,250,937                                        
|- write-down of investment in Legacy Mining Ltd.                            | -                                 | -                                 | 1,406,000                                        
|- write-down of interest in ACGT Corporation                                | -                                 | -                                 | 128,288                                          
|- loss on Iceberg Drive Inn investment                                      | -                                 | -                                 | 85,000                                           
|- option income received in shares                                          | -                                 | -                                 | (130,000)                                        
|- other non-cash expenses                                                   | -                                 | -                                 | 2,557,382                                        
|- net changes in working capital items                                      | 11,098                            | 8,719                             | 279,385                                          
|CASH FLOWS USED IN OPERATING ACTIVITIES                                     | (112,749)                         | (286,980)                         | (3,691,668)                                      
|                                                                            |                                   |                                   |                                                  
|                                                                            |                                   |                                   |                                                  
|CASH FLOWS FROM INVESTING ACTIVITIES                                        |                                   |                                   |                                                  
|Investment in Iceberg Acquisition Corporation                               | -                                 | -                                 | (120,000)                                        
|Interest in oil and gas properties, net of finders fees                     | (5,263)                           | (657,534)                         | (1,441,954)                                      
|CASH FLOWS USED IN INVESTING ACTIVITIES                                     | (5,263)                           | (657,534)                         | (1,561,954)                                      
|                                                                            |                                   |                                   |                                                  
|CASH FLOWS FROM FINANCING ACTIVITIES                                        |                                   |                                   |                                                  
|Bank overdraft (repayment)                                                  | -                                 | (2,187)                           | -                                                
|Net proceeds on sale of common stock                                        | 55,000                            | 1,161,840                         | 3,506,900                                        
|Net proceeds from common stock subscriptions                                | -                                 | -                                 | 633,000                                          
|Net advances (to) from related parties                                      | 53,869                            | (22,070)                          | 725,660                                          
|Advances receivable                                                         | -                                 | -                                 | 420,000                                          
|CASH FLOWS PROVIDED BY FINANCING ACTIVITIES                                 | 108,869                           | 1,137,583                         | 5,285,560                                        
|                                                                            |                                   |                                   |                                                  
|NET INCREASE (DECREASE) IN CASH                                             | (9,143)                           | 193,069                           | 31,938                                           
|                                                                            |                                   |                                   |                                                  
|CASH, BEGINNING OF PERIOD                                                   | 41,081                            | -                                 | -                                                
|                                                                            |                                   |                                   |                                                  
|CASH, END OF PERIOD                                                         | $       31,938                    | $     193,069                     | $          31,938                                

Supplemental cash flow information (See Note 8)



The accompanying notes are an integral part of these financial statements



AVALON ENERGY CORPORATION

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

March 31, 2006

(unaudited)



NOTE 1  NATURE OF OPERATIONS



The Company was incorporated as Venture Investments Inc. under the Laws of the State of Nevada on November 29, 1983.  The Company underwent a name change to Asdar Group on December 10, 1987, a name change to Precise Life Sciences Ltd. on April 30, 2002, a name change to Iceberg Brands Corporation on February 18, 2003, a name change to Avalon Gold Corporation on August 28, 2003 and a name change to Avalon Energy Corporation on March 22, 2005.  The Company was dormant from 1991 to 1996 and currently has no revenue generating operations.  The Company was considered a development stage company since January 1, 1996 and as a result of changing its business focus to acquisition and exploration of resource properties is considered to be an exploration stage company.



The financial statements have been prepared on the basis of a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has not generated any revenues or completed development of any commercially acceptable products or services to date, has a working capital deficiency of $89,247 at March 31, 2006 and has incurred losses of $21,043,676 since inception, and further significant losses are expected to be incurred in the exploration and development of its resource properties.  The Company will depend almost exclusively on outside capital through the issuance of common shares to finance ongoing operating losses and to fund the acquisition, exploration and development of its resource properties.  The ability of the Company to continue as a going concern is dependent on raising additional capital and ultimately on generating future profitable operations.  There can be no assurance that the Company will be able to raise the necessary funds when needed to finance its ongoing costs.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  The accompanying financial statements do not include any adjustments relative to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

NOTE 2  BASIS OF PRESENTATION

The unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B as promulgated by the Securities and Exchange Commission ("SEC").  Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements.  These unaudited interim financial statements should be read in conjunction with the audited financial statements for the period ended December 31, 2005 indexed in Form 10-KSB.  In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.

The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period.  Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported amounts of the Company's financial position and results of operations.

Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.



NOTE 3  AVAILABLE-FOR-SALE SECURITIES



During 2004, the Company received 2,000,000 restricted Rule 144 shares of Golden Spirit Gaming Ltd. (formerly Golden Spirit Minerals Ltd.) (Golden Spirit), a public company with directors and significant shareholders in common. The restricted shares were received as non-refundable consideration pursuant to agreements with Golden Spirit dated November 10, 2004 and December 10, 2004 to acquire certain mineral property interests from the Company.  These agreements were subsequently terminated.   During the year ended December 31, 2005 the Company had an unrealized loss totalling $100,000, which had been recorded as other comprehensive loss.  The Company recorded an unrealized holding gain in the carrying value of its available-for-sale securities totalling $34,000 which was recorded as other comprehensive income for the three months ended March 31, 2006.



On December 31, 2003, the Company agreed to settle an outstanding debt receivable of $122,988 from Legacy Mining Ltd. (Legacy) for the issue of 1,229,880 restricted shares of Legacy at a value of $0.10 per share representing a 9.8% interest in Legacy. These restricted shares were issued to the Company on February 20, 2004.  Legacy is a non-reporting entity with a director in common. Legacy is applying for listing on the OTC:BB and intends to become a fully reporting company in the USA.  In fiscal 2004, the Company wrote this investment down to $1 because management determined that it was not recoverable within a reasonable period of time.



NOTE 4  OIL AND GAS PROPERTIES



Oil and gas properties include the following:



|                                                                       |                  |             
|---------------------------------------------------------------------- | ---------------- | ------------
|                                                                       | March 31,        | December 31,
|                                                                       | 2006
(unaudited) | 2005        
|Acquisition and exploration costs, unproved, not subject to depletion. | $  1,021,022     | $  1,015,759
|                                                                       |                  |             



The Company's oil and gas activities are currently conducted in the United States. The following is a descripton of the Companys oil and gas acquisition and exploration activities:



Harvester Property, California, USA:

The Company owns a 2% royalty interest carried at a nominal value of $1 due to the uncertainty of realization.



LAK Ranch Oil Project, Wyoming, USA:

The Company owns a 0.7% gross overriding royalty interest on 6,360 acres of oil and natural gas rights located in the Powder River Basin of eastern Wyoming carried at a nominal value of $1 due to the uncertainty of realization.



Uinta Basin Property, Utah:

On October 26, 2004, the Company entered into a Letter of Intent with Pioneer Oil and Gas (Pioneer), whereby the Company could acquire an undivided Eighty-Five Percent (85%) working interest and an undivided Sixty-Eight (68%) net revenue interest in 13,189 acres located in Wasatch County, Utah, known as the Uinta Basin.  The Company paid Pioneer a deposit of $50,000 for the exclusive right to enter into a Participation Agreement with Pioneer on or before January 18, 2005.



On January 18, 2005, the Company entered into the Participation Agreement with Pioneer as described above.  The total consideration paid to Pioneer, including the $50,000 deposit described above, was



$706,279.  In addition, the Company issued 1,200,000 restricted common shares valued at $264,000 on February 7, 2005 as finders fees to certain third parties who were responsible for tabling the Uinta Basin



NOTE 4  OIL AND GAS PROPERTIES (continued)



Overpressured Gas Project to the Company.  The Company has also committed to paying a 1.5% gross royalty on all revenue received by it from the Uinta Basin Project.



As part of the agreement, Pioneer has agreed to provide the Company with 2-D seismic data crossing the acreage. Any additional seismic that Pioneer or the Company may mutually agree to acquire over the acreage shall be paid for entirely by the Company with the parties owning the data in the same proportion as their working interest in the acreage. In addition, the Company will be required to drill an initial test well at a location on the acreage mutually agreed upon by Pioneer and the Company. The Company will serve as the Operator in drilling the acreage.



The Company shall pay One Hundred Percent (100%) of all costs of drilling the first two wells drilled on the acreage along with 100% of all costs of logging or testing the wells.  If either of the first two test wells is deemed a dry hole, the Company shall pay One Hundred Percent (100%) of all costs of plugging and abandoning such well(s) and restoration of the surface upon which the well(s) reached its authorized depth and completion of all tests deemed necessary by the Operator.  If the Company elects to complete either or both of the first two wells drilled on the acreage, the Company shall pay One Hundred Percent (100%) of all completion costs through the tanks along with any costs associated to hook up the well(s) to pipeline for the well(s) to be capable of producing into a commercial pipeline for sale.  After the first two wells drilled, if productive, are hooked-up to a pipeline and capable of producing oil and gas in commercial quantities, the Company shall pay 85% of all costs of operating the first two wells and Pioneer shall pay 15% of the operation costs of such wells as reflected in their working interest ownership in such wells.  The Company is required to drill a well on the acreage before November 1, 2010, or the acreage acquired will revert back to Pioneer.  As at March 31, 2006, the Company has spent a total of $50,741 (December 31, 2005 - $45,478) on the initial exploration of the property.

NOTE 5  DEFERRED COMPENSATION



On February 1, 2005, the Company entered into an agreement with Holm Investments Ltd., (Holm) a private company owned by a significant shareholder of the Company, for a two year term, whereby Holm Investments Ltd. will provide investor relations services to the Company (valued at $55,000) in exchange for 250,000 restricted shares of the Companys common stock. Holm will provide such services as researching, editing and generating a company profile, relaying the Companys business perspectives and distribution of corporate updates, including press releases.



On May 15, 2005, the Company entered into an agreement with Palisades Financial Ltd., (Palisades) a private company owned by an individual who is management of the Company, for a two-year term, whereby Palisades will provide investment-banking services to the Company (valued at $56,000) in exchange for 400,000 restricted shares of the Companys common stock. The investment banker will provide access to investors and ongoing funding for the Companys investments, particularly the Uinta Basin project



The Company has been amortizing the costs of these services over the respective terms of the contracts.  At March 31, 2006, the unamortized portion of the deferred compensation totalled $54,417 (2005 - $68,290).



NOTE 6 - STOCKHOLDERS EQUITY



(1)   2006 Stock Transactions



During the three months ended March 31, 2006, the Company issued 500,000 common shares pursuant to the Companys 2005 Stock Incentive and Option Plan at $0.11 per share for proceeds of $55,000.

NOTE 6 - STOCKHOLDERS EQUITY



(2)

2006 - Stock Options



(a)

The fair value of the common stock options granted during the year was measured at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:

|                                |      
|------------------------------- | -----
|                                |      
|Expected dividend yield         | 0%   
|Risk-free interest rate         | 4.34%
|Expected volatility             | 147% 
|Expected option life (in years) | 5    



(b)

During the three months ended March 31, 2006 the Company granted a total of 500,000, 5 year common stock options at an exercise price of $0.11.  Of these options, all were granted to consultants.  The Company recognized stock-based compensation of $50,000, which represented the fair value of shares issued for consulting services rendered by consultants to the Company.  As at March 31, 2006, there are 5,875,000 stock options available for grant.



(c)

The Companys stock option activity is as follows:



|                           |                   |                                    |                                            
|-------------------------- | ----------------- | ---------------------------------- | -------------------------------------------
|                           | Number of options | Weighted Average Exercise Price    | Weighted Average Remaining Contractual Life
|Balance, December 31, 2005 | -                 | $                                - | -                                          
|Granted                    | 500,000           | 0.11                               | 5 years                                    
|Exercised                  | (500,000)         | -                                  | -                                          
|Balance, March 31, 2006    | -                 | $                                - | -                                          





NOTE 7  RELATED PARTY TRANSACTIONS



During the three months ended March 31, 2006, the Company incurred $3,896 (2005 -$14,111) in management fees to directors. As at March 31, 2006 the Company owes $9,000 in management fees.



During the three months ended March 31, 2006, the Company incurred $5,353 (2005 - $5,116) in rent and office expenses to a private company controlled by a shareholder.



During the three months ended March 31, 2006, the Company incurred $64,999 (2005 - $235,786) in consulting fees to significant shareholders and $10,420 (2004 - $4,947) in professional fees to employees.



During the three months ended March 31, 2006, a company controlled by significant shareholder earned $6,874 (2005 - $4,584) pursuant to prepaid services agreements (See note 6).



At March 31, 2006, an amount of $140,846 (2005 - $75,312) was receivable from Golden Spirit.  These amounts are non-interest bearing and have no specific terms of repayment.

At March 31, 2006, an amount of $1001 (2005 - $1) was receivable from Legacy Mining Ltd.  These amounts are unsecured, non-interest bearing and have no specific terms of repayment.

At March 31, 2006 and December 31, 2005, amounts due to related parties were $96,280 and $68,857, respectively.



NOTE 8  SUPPLEMENTAL CASH FLOW INFORMATION



|                                 |                                   |                                  
|-------------------------------- | --------------------------------- | ---------------------------------
|                                 | Three months ended
March 31, 2006 | Three months ended
March 31, 2005
|Cash paid during the period for: |                                   |                                  
|Interest                         | $                 -               | $                 -              
|Income taxes                     | $                 -               | $                 -              





NOTE 9 - CONTINGENCY



On February 21, 2002, the Company issued 350,000 shares valued at $119,000 to Empire Sterling Corporation for services to be rendered with respect to the acquisition of ACGT Corporation (ACGT).  The shares were to be held in trust and not sold until all necessary financing was in place to complete the ACGT acquisition. Empire Sterling Corporation breached the trust agreement and the Company placed a stop transfer on these shares and requested they be returned to the Company. Empire Sterling Corporation failed to return the share certificate and as such, the Company commenced court proceedings against the principals of Empire Sterling Corporation. The Company argued for an interim injunction against all parties and was successful. On May 9, 2002, the Court ordered Empire Sterling Corporation to deposit the shares with the Court pending judicial disposition.  The Company continued to file legal process claiming ownership of the shares and breach of trust inter alia. The Company was successful and has now applied to have the share certificates released and subsequently cancelled. As of March 31, 2006, the Company is still in the process of having the certificates released.



NOTE 10 - SUBSEQUENT EVENTS



On April 6, 2006, the Company issued 100,000 of restricted common shares valued at $12,000 to a Consultant for services related to the Uinta Basin Prospect  On January 27, 2006, the Company signed a Letter of Intent with a placement agent in regard to possible financing activities.  The Agreement is subject to the satisfactory completion of due diligence by the placement agents.



On April 24, 2006, the Company signed the Placement Agency Agreement.  The Placement Agent will, on an exclusive basis, conduct the Placement on a best efforts all or none basis of 32 Units for gross proceeds of $800,000. Each unit consists of 250,000 shares at $25,000 per unit and a warrant to purchase, at any time prior to the 2nd anniversary following the final closing date of the Placement, 125,000 shares of common stock with an exercise price equal to $0.20 per share. The Placement shall commence on April 24, 2006, and shall expire on that date which is 60 days from April 24, 2006, provided; however, the Placement shall be extended for up to an additional 30 day period without notice to investors in the Placement at the mutual discretion of the Placement Agent and the Company.  The minimum subscription amount per Investor shall be $25,000 although the Placement Agent may accept subscriptions for less than a whole Unit.  The financing has not yet closed.



ITEM 2.

PLAN OF OPERATION.

THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL FACT.  FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY", "SHALL", "WILL", "COULD", "EXPECT", ESTIMATE", "ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS.  THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN COMPILED BY OUR  MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.



THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.



Our Background. Avalon Energy Corporation was formed under the laws of the State of Nevada on November 29, 1983 under the name Venture Group, Inc. On February 11, 1986, an amendment to the Articles of Incorporation was filed changing the corporate name to Asdar  Corporation. On December 10, 1987, another amendment to the Articles of Incorporation was filed changing the corporate name to Asdar Group.  On February 18, 2001, Asdar Group filed a Certificate of Reinstatement with the Secretary of State of Nevada. On April 30, 2002, another amendment to the Articles of Incorporation was filed changing the corporate name to Precise Life Sciences Ltd. Additional amendments to the Articles of Incorporation were filed changing the corporate name as follows:



February 18, 2003 - Iceberg Brands Corporation

August 28, 2003 - Avalon Gold Corporation

March 22, 2005 - Avalon Energy Corporation



Avalon Energy Corporation was originally incorporated to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Nevada.  Avalon Energy Corporation, under former management, from its inception in 1983 to 1986, was engaged primarily in the acquisition of controlling equity positions in companies experiencing financial or operating difficulties.  During 1985 and 1986, Avalon Energy Corporation sold its equity positions in these companies.



Avalon Energy Corporation, under former management, in 1987, announced its Registration Distribution Program, which was designed to assist privately-owned companies in becoming publicly held.  As a result of a regulatory review in 1988, certain changes were required to be made to the program which former management deemed to be impracticable and all efforts in this business were terminated in 1990.



Our Business. Avalon Energy Corporation was inactive and a shell corporation from 1991 to December 1995, when the company began the process of identifying potential business interests, including, but not necessarily limited to, interests in the "Internet E-Commerce".  In this regard, on March 8, 2000, Avalon Energy Corporation signed a Technology Development Agreement with TekMaster Ltd., a British Columbia corporation, and with Xntrik Enterprises Ltd., a British Columbia corporation (the "Tech Agreement"), to fund development of a Scalable Server Platform. The Tech Agreement called for Avalon Energy Corporation to issue two million (2,000,000) shares of the company's $.001 par value common stock with Rule 144 Restrictions, valued at $600,000 and to fund two hundred thousand ($200,000) dollars in Canadian Funds for ongoing development costs. The Tech Agreement also called for Xntrik Enterprises Ltd. to design and develop the software and for Tek Master Ltd. to design an interface for an administrative toolkit to manage clients.



Avalon Energy Corporation spent U.S. $737,300 to develop the scalable server platform. However, with the sharp decline in the Internet industry, Avalon Energy Corporation decided to abandon the project. The costs associated with this project were expensed.  During the time Avalon Energy Corporation was reconsidering its Internet-related activities, it first ventured into a project involving the tagging of cattle from birth to prevent the breakout of mad cow disease. This project, under the name of Precise Life Sciences Ltd. was not pursued. Secondly, the Company ventured into a project involving the franchising of the Iceberg Drive Inn chain of restaurants. This project, under the name of Iceberg Brands Corporation was also not pursued. Ultimately, management of the Company decided to pursue mineral properties and oil and gas interests.



2



Our Oil and Gas Properties



1. The Utah Property.



On October 26, 2004, the Company entered into a letter of intent with Pioneer Oil and Gas ("Pioneer"), a Utah Corporation for the exclusive right to enter into a Participation agreement with Pioneer on or before January 18, 2005. The Company advanced Pioneer a $50,000 non-refundable deposit and in return was pledged an exclusivity period to carry out its due diligence with respect to acquiring certain overpressured gas leases in the Uinta Basin, Utah.

On January 18, 2005, the Company entered into a Participation Agreement with Pioneer to acquire an undivided Eighty-Five Percent (85%) working interest and an undivided Sixty-Eight (68%) net revenue interest in 13,189 acres located in Wasatch County, Utah, known as the "Uinta Basin".



The Company had an independent title search conducted on the acreage involved in the Participation Agreement and determined that Pioneer had good and marketable title to the leases. As such, on January 18, 2005, the Participation Agreement was duly signed and the balance of 656,279 was delivered to Pioneer to complete the closing. The total consideration paid to Pioneer to acquire the 13,189 acres was $706,279.



In addition, certain non-related parties were responsible for tabling the Uinta Basin Over-pressured Gas Project to the Company.  The Company issued 1,200,000 restricted common shares valued at $264,000 on February 7, 2005 to these parties for their efforts resulting in the acquisition of 13,189 acres in Wasatch County, Utah.



The Company has spent a total of $970,279 in acquisition costs and $50,741 in development costs on the Uinta property to date. The Company is currently receiving quotations for a seismic survey and an environmental impact study.



As part of the agreement, Pioneer has agreed to provide the Company with 2-D seismic data crossing the acreage, on a confidential basis. Any additional seismic that Pioneer or the Company may mutually agree to acquire over the acreage shall be paid entirely by the Company with the parties owning the data in the same proportion as their working interest in the acreage. In addition, the Company will be required to drill an initial test well at a location on the acreage mutually agreed upon by Pioneer and the Company. The Company will serve as the Operator in drilling the acreage and must drill the initial well prior to November 1, 2010.



The Company shall pay One Hundred Percent (100%) of all costs of drilling the first two wells drilled on the  acreage along with 100% of all costs of logging or testing the wells.  If either of the first two test wells is deemed a dry hole, the Company shall pay One Hundred Percent (100%) of all costs of plugging and abandoning such well(s) and restoration of the surface upon which the well(s) reached its authorized depth and completion of all tests deemed necessary by the Operator.



If the Company elects to complete either or both of the first two wells drilled on the acreage, the Company shall pay One Hundred Percent (100%) of all completion costs through the tanks along with any costs associated to hook up the well(s) to pipeline for the well(s) to be capable of producing into a commercial pipeline for sale.  If the Company does not wish to participate in an attempted completion of a well, the Company shall so notify Pioneer within Twenty-Four (24) hours (excluding Saturday, Sunday and legal holidays) after reaching Casing Point and all electric logs have been received, at which time the provisions of Article VI of the Operating Agreement shall govern such completion attempt.



After the first two wells are drilled and if productive are hooked-up to a pipeline and capable of producing oil and gas in commercial quantities, the Company shall pay 85% of all costs of operating the first two wells and Pioneer shall pay 15% of the operation costs of such wells as reflected in their working interest ownership in such wells.



3



Subsequent wells drilled after the first two wells on the Contract Acreage shall require Pioneer to either farm out its interest on a well by well basis under Article VI herein or participate or not participate for its interest in the well pursuant to the provisions contained in the Operating Agreement.



On November 10, 2004, the Company entered into an agreement with Golden Spirit Mining Ltd., ("Golden Spirit") a company with directors in common, to sell a 40% working interest in the Uinta Basin Lease.  Upon signing of the agreement, Golden Spirit issued 1,000,000 restricted Rule 144 common shares valued at $70,000 as a non-refundable deposit to the Company. Golden Spirit had a right to acquire the 40% working interest in the gas lease upon the Company receiving a payment of US$750,000 on or before December 10, 2004.



On December 10, 2004, the Company granted Golden Spirit an extension until December 24, 2004 to meet the requirements of the initial agreement. The Company received an additional non-refundable 1,000,000 restricted Rule 144 common shares valued at $60,000 as consideration for the extension. In return, Avalon will issue and deliver 2,000,000 shares of its common stock to Golden Spirit. The Company did not receive the payment of US$750,000 and on January 4,

2005 the Company issued a default notice to Golden Spirit for failure to meet the terms of the agreements which were terminated. The 2,000,000 restricted Rule 144 common shares are recorded as available for sale securities.



In March, 2006, the Company has filed a Notice of Intent and Authorization to Conduct Oil and Gas Geophysical Exploration Operations with the United Sates Bureau of Land Management (BLM) for its Shotgun Draw prospect in Wasatch County, Utah. The application seeks approval for seismic exploration consisting of two 2-D seismic line layouts covering five miles across the Shotgun Draw federal lease. The survey method will consist of numerous shotholes at spacing intervals of 330 feet. The Company anticipates taking advantage of existing roads, wherever possible, to minimize the logistics and costs to conduct the survey.



The Company is currently in contract negotiations with a Geophysical company that has a proven track record of performing seismic related work all over the western United States. The approval of the BLM application and the formalization of the seismic contract are expected to complete prior to the proposed start of seismic exploration in the late spring or early summer of 2006.



The Company is also in the process of raising the necessary funding to complete the proposed 2-D seismic shoot. (See Item 2  Other Subsequent Changes in Securities)



2. The Wyoming Property. The Company owns a 0.7% gross overriding royalty interest on 6,360 acres of oil and natural gas rights located in the Powder River Basin of eastern Wyoming carried at a nominal value of $1 due to the uncertainty of realization. During the year ended December 31, 2004, there was no production from the Wyoming property.



In January of 2004, Derek Oil and Gas Corporation and Ivanhoe Energy (USA) Inc. formalized their agreement to jointly develop the LAK Ranch field using thermal recovery technology.



Based on Avalon's ongoing agreement with respect to the LAK Ranch, if Derek sells any or all of its interest in the LAK Ranch Property, it will pay to Avalon, subject to adjustments, 7.5% of the net sales proceeds on the first USD$7,500,000 and 1% on any balance over and above USD$7,500,000.



Under terms of their agreement, Ivanhoe will become operator and earn a 30-percent working interest in the project by financing the $1.1-million in capital cost of pilot phase. Following the pilot phase, Ivanhoe has the option to increase its working interest to 60 per cent by providing an additional $3.9- million in capital costs toward the initial development phase. After the $5- million (U.S.) threshold is reached, all future capital expenditures will be shared on a working-interest basis.



In the first quarter of 2004, surface preparations were complete and steaming operations began. Assuming successful development of the project, the companies expect to recover between 30 and 70 million barrels of oil using thermal recovery techniques. There is no assurance that these numbers are achievable given such factors as fluctuations in world prices for oil, general market conditions, risks inherent in operations and risks generally associated with enhanced recovery projects.



The LAK Ranch field, originally discovered in the 1920s, covers approximately 7,500 acres in the Powder River basin. Historically, oil production has been sporadic from a limited number of wells completed in the Newcastle Sand due to the abnormally low reservoir temperature in this part of the basin. However, the oil contains high levels of naphtha and the viscosity should respond dramatically to the application of heat through steam injection. To date, Derek has completed SAGD test well pair that was drilled to a depth of 1,000 feet and 1,800 feet horizontally into the Newcastle sand formation. Prior to 2004, more than 5,000 barrels of oil were recovered in limited preliminary testing. Avalon, through its predecessor Asdar has received royalty payments from the sale of every barrel of oil sold to date.



4

Ivanhoe Energy (USA) Inc. received approval on April 13, 2004 from the Wyoming Oil and Gas Commission to restart steam flooding of the LAK Field and the associated environmental monitoring plan.



Ivanhoe, as operator, reports that 13,000 barrels of steam were injected into the reservoir from late April through the end of May, 2004, using the existing horizontal production well, Derek 1-P. Approximately 70% of the steam has been recovered to date and oil cuts are beginning to improve as anticipated. The oil is high-quality 19-degree API gravity, and contains high levels of naphtha. The second steam cycle began in July, 2004, using a larger quantity of steam at a

higher pressure to further stimulate oil production. The Wyoming Oil and Gas Conservation Commission has approved the higher surface injection pressure for the second cycle. The injection phase of the second round of cyclic steaming at LAK Ranch has been completed, with about 13,000 barrels of steam having been injected. As of October 12, about 20% of the load water has been recovered and some oil production has begun. The performance of the second steaming cycle is at approximately the same level as Ivanhoe's current reservoir model prediction.

Plans are to continue to produce the well and adjust the model based on the newly acquired data. To date the results of the second steam cycle are positive and are similar to results observed in other heavy oil steam flood. In April 2005, the third steam cycled commenced and to date has also been successfully completed.



In November, 2004, the first part of the US$900,000 3-D seismic survey was begun at LAK Ranch. Some 3,800 receiver stations were surveyed and surveying of the source point locations was commenced. In December, 2004, Ivanhoe Energy (USA) Inc. reported the successful completion of the data acquisition phase of the 3D seismic survey, at the LAK Ranch project in NE Wyoming. The survey has yielded excellent quality data. Processing and interpretation of the 3D data is underway and is on course for defining high-resolution targets that should permit continued development of the LAK Ranch.



Plans have begun for an additional vertical well, located approximately 200 feet north of the existing horizontal well pair. This well will be used for pressure and/or temperature monitoring of steam injection and for calibrating the seismic survey with up-to-date sonic data. The vertical well location has been selected so that it may be used as a future steam injector. Drilling of the well was completed in March, 2005.



In addition, Pacific Geotechnical Associates, of Bakersfield, California has been retained to prepare an independent geologic/reservoir model incorporating all of the available LAK Ranch Project data. A great deal of this project data is now available in digital format from Ivanhoe Energy (USA) Inc., the project operator. New well data and 3-D seismic data will be integrated into the model as it becomes available.



5

In November 2005, it was reported that independent technical consultants have carried out further interpretation of 3D seismic data in the horizons deeper than the Newcastle Sandstone.  This in depth work has led to the discovery of several new exploration targets in deeper horizons below the Newcastle Sandstone.  Numerous options are available with respect to the exploration and development of these new targets.



Since the commencement of continuous steaming in October 2005, the shallower Newcastle Sandstone, which is being developed under an existing agreement, is currently producing increased quantities of oil from 40 to 60 barrels per day.



During 2005, Derek reported the following accomplishments on the LAK Ranch operations:

·

In January of 2005 Derek reported completion of a $1 million USD 3-D seismic survey over 4.5 miles of the 7500 acre LAK Ranch property

·

Three vertical injector wells were drilled, cased and activated

·

Commenced the Continuous Steaming Program which demonstrated immediate positive results

·

Increased oil production from a level of 10 to 15 bopd to 45-80 bopd

·

Derek discovered new hydrocarbon potential through 3D seismic interpretation in lower horizons of the reservoir

·

Derek initiated discussions with Ivanhoe Energy to explore and develop the new hydrocarbon potential while continuing development and improving production levels from the Newcastle formation

·

In December 2005 the LAK Ranch project broke even for the first time.

During 2006, Derek anticipates corporate operations on the LAK Ranch to include the following:

·

Supporting Ivanhoe & their exceptional technical expertise with enhanced oil recovery methods on the Newcastle formation of the LAK Ranch reservoir

·

Offering Ivanhoe potential strategies evaluated by Derek's consultants at Pacific Geotechnical and its highly qualified board of directors

·

Monitoring results from the Continuous Steaming Program

·

Establishing the economic viability of the project

·

Working with Ivanhoe to determine the most cost effective plan to reach commercial production of the significant amounts of high quality oil that exists in the LAK Ranch reservoir

·

Evaluating the ideal strategy to explore & develop the hydrocarbon potential in deeper horizons

·

Determining an effective drill program

·

Monitoring that the highest possible price is being received for LAK Ranch oil production

·

Researching to acquire more land for further exploration & development

The Company received $1,272 in oil royalties in 2005 and $1,523 in the first quarter of 2006.



6



3. The California Property.



The Company owns a 2% royalty interest in the Harvester Property carried at a nominal value of $1 due to the uncertainty of realization.



Our Mineral Properties:



LSA Mineral Claims, Nevada.  By Agreement dated January 26, 2004 and subsequent amendments dated March 8, 2004 and August 11, 2004 the Company agreed to acquire a ninety-percent (90%) interest in seven (7) lode mining claims known as the LSA claims, located in Lander County, Nevada. As of December 31, 2005, management has decided not to proceed with its acquisition of the LSA claims.



Available for Sale Securities.  During 2004, the Company received 2,000,000 restricted Rule 144 shares of Golden Spirit Minerals Ltd. (Golden Spirit), a public company with directors and significant shareholders in common. The restricted shares were received as non-refundable consideration pursuant to agreements dated November 10, 2004 and December 10, 2004 with Golden Spirit. Effective December 31, 2004 the Company recorded an unrealized loss in the carrying value of its available-for-sale securities totalling $10,000 which was recorded as other comprehensive loss for the year.  During the year ended December 31, 2005 the Company recorded an unrealized loss in the carrying value of its available-for-sale securities totalling $90,000 which was recorded as other comprehensive loss for the period.  As at March 31, 2006 the Company recorded unrealized gain in the carrying value of its available-for-sale securities totaling $34,000, which was recorded as other comprehensive income for the period.  The 2,000,000 shares of Golden Spirits common stock is carried at fair market value of $64,000 as at March 31, 2006.



On December 31, 2003, the Company agreed to settle an outstanding debt receivable of $122,988 from Legacy Mining Ltd. (Legacy) for the issue of 1,229,880 restricted shares of Legacy at a value of $0.10 per share representing a 9.8% interest in Legacy. These restricted shares were issued to the Company on February 20, 2004.  Legacy is a non-reporting entity with a director in common. Legacy is applying for listing on the OTC: BB and intends to become a fully reporting company in the USA.  In fiscal 2004, the Company wrote this investment down to $1 because management determined that it was not recoverable within a reasonable period of time.



7



Liquidity and Capital Resources.



For the three month period ended March 31, 2006, we had total assets of $1,259,580, including cash of $31,938, and taxes recoverable of $1,773  We have $1,021,022 invested in oil and gas properties, which is represented by $1,021,020 for 13,189 acres of gas leases located in Utah, $1 for an oil and gas interest located in Wyoming and $1 for an oil and gas interest located in San Joaquin, California.  We have available for sale securities with a fair value of $64,000 as at March 31, 2006, a long-term investment in Legacy Mining Ltd. recorded at a nominal value of $1 and a long- term receivable from Golden Spirit Gaming Ltd. at cost of $140,846. The increase in assets was primarily due the acquisition of the Uinta Basin property in Utah.



At March 31, 2006, we had current liabilities of $122,958, which was represented by accounts payable and accrued liabilities of $26,678 and $96,280 due to related parties. At December 31, 2005 we had current liabilities of $83,473. The increase in liabilities was due to an increase in funds due to related parties and an increase in accounts payable.  At March 31, 2006, we had a working capital deficiency of $89,247 (December 31, 2005 - $41,582).



We do not believe that our current cash resources will be able to maintain our current operations for an extended period of time.   We will be required to raise additional funds or arrange for additional financing over the next 12 months to adhere to our development schedule.  No assurance can be given, however, that we will have access to additional cash in the future, or that funds will be available on acceptable terms to satisfy our working capital requirements. If we are not able to arrange for additional funding or if our officers, directors and shareholders stop advancing funds to us, we may be forced to make other arrangements for financing such as loans or entering into strategic alliances. We have not identified any alternative sources of financing.



Results of Operations



We have not yet realized any revenue from operations to date. Loss from operations is $187,720 (2005 - $633,179).  This decrease in loss was due to a decrease in stock based compensation expenses and consulting expenses.



From inception to March 31, 2006 Avalon Energy Corporation has incurred cumulative net losses of $21,043,676 resulting primarily from the write-down of $2,251,937 in its interests in oil and gas properties, write-down of $1,406,000 in its interest in ACGT Corporation, write-down of its investment in Legacy Mining Ltd. and also as a result of selling, general and administrative expenses including a litigation settlement of $2,291,070; management and consulting fees of $4,057,397; office and general expenses of $2,267,393; professional fees of $898,774; interest expense of $98,282 and software development costs of $737,300. In addition, we received $130,000 in property option income as a recorded value of certain restricted shares in Golden Spirit Mining Ltd. (See Part I, Utah property).



The cash and equivalents constitute our present internal sources of liquidity.



Because we are not generating any significant revenues, our only external source of liquidity is the sale of our capital stock and any advances from officers, directors or shareholders.



Our Plan of Operation for the Next Twelve Months



We anticipate that we will need to raise additional capital within the next 12 months in order to continue as a going concern.  The Company is in the process of raising $800,000 to fund the next phase of the Shotgun Draw, Uinta basin Overpressured Gas Project which is a 2-D seismic line.  To the extent that additional capital is raised through the sale of equity or equity- related securities, the issuance of such securities could result in dilution of our stockholders.  There can be no assurance that additional funding will be available on favorable terms, if at all.  If adequate funds are not available within the next 12 months, we may be required to curtail our operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to certain of our assets that we would not otherwise relinquish.



8

Avalon Energy Corporation does anticipate some expenditures within the next 12 months for its new acquisition in the Uinta Basin, Utah that should not affect its liquidity. Avalon will be seeking quotes on performing seismic on its acreage and it will also be seeking quotes on the cost of an environmental impact study requested by the regulatory authorities in Utah. Avalon will be seeking drilling permits in Utah and will incur costs towards an environmental study with respect to its 13,189 acres. In July 2005, based on a Well Development Report by Oso Energy Corporation, an engineering consulting firm based out of Durango, Colorado, it has been identified that the cost to drill each well would be at least $9,500,000 USD to a depth of about 16,000 feet.  Management has retained surveyors, based on their availability, to conduct appropriate work required for a 2-D seismic line.



The Company may elect to raise funds for potential drilling through equity financing or possible joint venture partnerships. Avalon Energy Corporation does not anticipate any significant mineral exploration costs within the next 12 months, nor does the Avalon Energy Corporation anticipate that it will lease or purchase any significant equipment within the next 12 months. Avalon Energy Corporation does not anticipate a significant change in the number of its employees within the next 12 months.



During 2006, the Companys plan to perform a 2-D seismic line on our Shotgun Draw, Uinta Basin prospect is estimated at a cost of $550,000 USD.  The Company plans to fund this through equity financing. (See Item 2  Other Subsequent Changes in Securities)



Off Balance Sheet Arrangements



The company has not entered into any off balance sheet arrangements.



Recent Accounting Pronouncements



In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140, to simplify and make more consistent the accounting for certain financial instruments. SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, Accounting for the Impairment or Disposal of Long-Lived Assets, to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 applies to all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006, with earlier application allowed. This standard is not expected to have a significant effect on our future reported financial position or results of operations.

9



In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156 ("SFAS No. 156"), Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits for subsequent measurement using either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement No. 140. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. SFAS 156 is effective for an entity's first fiscal year beginning after September 15, 2006.

The Company adopted SFAS 156 effective January 1, 2006 and elected to apply the fair value method for its Available for Sale Securities with changes in fair value reflected in earnings for subsequent measurement. There were no differences between the fair value and the carrying amount on its Available for Sale Securities on January 1, 2006.



ITEM 3.CONTROLS AND PROCEDURES



EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES



Our Chief Executive Officer, and our Chief Financial Officer, have performed an evaluation of the Company's disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of March 31, 2006 and each has concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms.



CODE OF ETHICS



We intend to adopt a code of ethics in 2006 that applies to our principle executive officer, principal financial officer, principle accounting officer or controller, other persons performing similar functions.  We intend to post the text of our code of ethics on our website in connection with our "Investor Relations" materials.  In addition, we intend to promptly disclose (1) the nature of any amendment to our code of ethics that applies to our principle executive officer principal  financial officer, principle accounting officer or controller, other persons  performing similar functions (2) the nature of any wavier, including an implicit wavier, from a provision of our code of ethics that is granted to one of these specific officers, the name of such person who is granted the waiver and the date of the waiver on our web site in the future.



We do not currently have a code of ethics as this is a new regulatory requirement and we are examining the various form and contents of other companies written code of ethics, discussing the merits and meaning of a code of ethics to determine the best form for our Company.



PART II  OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.



On February 21, 2002, the Company issued 350,000 shares valued at $119,000 to Empire Sterling Corporation for services to be rendered with respect to the acquisition of ACGT Corporation.  The shares were to be held in trust and not sold until all necessary financing was in place to complete the ACGT acquisition. Empire Sterling Corporation breached the trust agreement and the Company placed a stop transfer on these shares and requested they be returned to the Company. Empire Sterling Corporation failed to return the share certificate and as such, the Company commenced court proceedings against the principals of Empire Sterling Corporation. The Company argued for an interim injunction against all parties and was successful. On May 9, 2002, the Court ordered Empire Sterling Corporation to deposit the shares with the Court pending judicial disposition.  The Company continued to file legal process claiming ownership of the shares and breach of trust inter alia. The Company was successful and has now applied to have the share certificate released and subsequently cancelled.  As at March 31, 2006, the Company is still in the legal process of having the certificate released.



10

ITEM 2  CHANGES IN SECURITIES



2006 Stock Transactions



During the period ended March 31, 2006, the Company issued:



(a) 500,000 common shares pursuant to the Companys 2005 Stock Incentive and Option Plan at $0.11 per share for proceeds of $55,000.



2005 Stock Transactions

During the year ended December 31, 2005, the Company issued:

(a)

5,950,000 Series A Units at $0.15 per unit upon completion of a private placement for total proceeds of $892,500.  Each Series A Unit issued by the Company was comprised of (i) one restricted share of the Companys $0.001 par value common stock and (ii) a series A warrant which will enable the subscriber to acquire from the Company one share of the Companys $0.001 par value common stock at a purchase price of $0.50 per share for a period of eighteen months.  A finders fee of ten percent of the total proceeds was paid in the form of 595,000 restricted common shares of the Company, valued at $130,900.  In addition, the finder who raised the majority of the proceeds will also receive a 1.5% gross royalty of all revenue produced by the Uinta Basin project and paid to the Company.

(b)

7,225,000 common shares pursuant to the Companys 2005 Stock Incentive and Option Plan at various prices for proceeds of $993,410;



(c)

150,000 restricted common shares valued at $31,000 to two consultants as compensation for their appointment to the advisory board;



(d)

1,200,000 restricted common shares to four parties valued at $264,000 for their assistance to the Company in acquiring the Uinta Basin project;



(e)

250,000 restricted common shares for a prepaid investor relations services contract valued at $55,000 which was recorded as deferred compensation;





11



(f)

400,000 restricted common shares for an investment banking service contract valued at $56,000 which was recorded as deferred compensation; and



(g)

125,000 restricted common shares previously issued for consulting services to be rendered in the amount of $16,250 were cancelled and returned to treasury.





2006 - Stock Options



(a)

The fair value of the common stock options granted during the year was measured at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:



|                                |      
|------------------------------- | -----
|                                |      
|Expected dividend yield         | 0%   
|Risk-free interest rate         | 4.34%
|Expected volatility             | 147% 
|Expected option life (in years) | 5    



(b)

During the three months ended March 31, 2006 the Company granted a total of 500,000, 5 year common stock options at an exercise price of $0.11.  Of these options, all were granted to consultants.  The Company recognized stock-based compensation of $50,000, which represented the fair value of shares issued for consulting services rendered by consultants to the Company.  As at March 31, 2006, there are 5,875,000 stock options available for grant.





12



(c)

The Companys stock option activity is as follows:



|                           |                   |                                   |                                            
|-------------------------- | ----------------- | --------------------------------- | -------------------------------------------
|                           | Number of options | Weighted Average Exercise Price   | Weighted Average Remaining Contractual Life
|Balance, December 31, 2004 | -                 | $                               - | -                                          
|Granted during 2005        | 7,350,000         | 0.08                              |                                            
|Cancelled  during 2005     | (125,000)         | -                                 |                                            
|Exercised during 2005      | (7,225,000)       | -                                 |                                            
|Balance, December 31, 2005 | -                 | -                                 | -                                          
|Granted during 2006        | 500,000           | 0.11                              | 5 years                                    
|Exercised during 2006      | (500,000)         | -                                 |                                            
|Balance, March 31, 2006    | -                 | $                               - | -                                          



2005 - Stock Options



(a)

The fair value of the common stock options granted during the year was measured at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:



|                                |              
|------------------------------- | -------------
|                                |              
|Expected dividend yield         | 0%           
|Risk-free interest rate         | 3.71% - 4.17%
|Expected volatility             | 44% - 133%   
|Expected option life (in years) | 5            



(b)

During the year ended December 31, 2005 the Company granted a total of 7,350,000, 5 year common stock options at exercise prices of between $0.11 and $0.26 per share.  Of these options, a total of 460,000 were granted to an employee and 6,890,000 were granted to consultants.  The stock options granted to employees vested immediately upon grant. Of the total 6,890,000 share options granted to consultants, 3,693,000 were granted to directors and officers, significant shareholders and companies owned by these individuals.  On August 30, 2005, 125,000 of these stock options were cancelled.  The Company recognized stock-based compensation of $620,640 in accordance with SFAS 123 which represented the fair value of shares issued for consulting services rendered by consultants to the Company.  The value of the stock options granted to related parties was recorded at $639,810. The 460,000 stock options granted to an employee were valued at $40,800 which has been recorded on a pro-forma basis.





(d)

On January 19, 2005, the Company filed a Registration Statement on Form S-8 to register 5,000,000 shares of common stock to be issued pursuant to the Companys 2005 Stock Incentive and Option Plan (the Plan). These shares are to be issued when required from authorized and unissued common stock of the Company. The purpose of the plan is to provide the opportunity for eligible employees, consultants and members of the Board of Directors to increase their proprietary interest in the Company and as an incentive for them to remain in the service of the Company. The option price is set at the fair market value of the common stock at the date of issue. The term of the options, once granted, is not to exceed five years.



13



(e)

On June 1, 2005, the Company filed a Registration Statement on Form S-8 to register 4,800,000 shares of common stock to be issued pursuant to the Plan.   These shares are to be issued when required from authorized and unissued common stock of the Company.  The purpose of the plan is to provide the opportunity for eligible employees, consultants and members of the Board of Directors to increase their proprietary interest in the Company and as an incentive for them to remain in the services of the Company. The option price is set at the fair market value of the common stock at the date of issue. The term of the options, once granted, is not to exceed five years.



(f)

On December 15, 2005, the Company filed a Registration Statement on Form S-8 to register 3,800,000 shares of   common stock to be issued pursuant to the Plan.  These shares are to be issued when required from authorized and unissued common stock of the Company.  The purpose of the plan is to provide the opportunity for eligible employees, consultants and members of the Board of Directors to increase their proprietary interest in the Company and as an incentive for them to remain in the services of the Company. The option price is set at the fair market value of the common stock at the date of issue. The term of the options, once granted, is not to exceed five years.  To date none of these options have been granted.



2006 OTHER SUBSEQUENT CHANGES IN SECURITIES



On April 6, 2006, the Company issued 100,000 of restricted common shares valued at $12,000 to a Consultant for services related to the Uinta Basin Prospect



On April 24, 2006, the Company entered into a certain Placement Agency Agreement with an investment banking firm.  The Placement Agent will, on an exclusive basis, conduct the Placement on a best efforts all or none basis of 32 Units for gross proceeds of $800,000. Each unit consists of 250,000 shares at $25,000 per unit and a warrant to purchase, at any time prior to the 2nd anniversary following the final closing date of the Placement, 125,000 shares of common stock with an exercise price equal to $0.20 per share. The Placement shall commence on April 24, 2006, and shall expire on that date which is 60 days from April 24, 2006, provided; however, the Placement shall be extended for up to an additional 30 day period without notice to investors in the Placement at the mutual discretion of the Placement Agent and the Company.  The minimum subscription amount per Investor shall be $25,000 although the Placement Agent may accept subscriptions for less than a whole Unit.  The financing has not yet closed.



ITEM 4. Submission of Matters to Vote of Security Holders



None.



ITEM 5.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.





14



The following table sets forth information as of March 31, 2006, with respect to the ownership of the Avalon Energy Corporation's common stock by each person known by Avalon Energy Corporation to be the beneficial owner of more than five percent (5%) of Avalon Energy Corporation's common stock, by each director and officer and by all officers and directors as a group.



Name of             Address of                      Amount of Shares      % of Outstanding

Beneficial Holder   Beneficial Holder               Beneficially Owned    Common Stock

- ---------------------------------------------------------------------------------------



Cede & Co.

The Depository Trust Co

27,651,897 (1)



71.08 %

PO Box 222 Bowling Green Station

New York, NY 10272



Carlton Parfitt

#2025 -1358 W. Georgia Street  50,000

0.0013 %

President /Director    Vancouver, BC V7T 1A8



Robert Klein

4540 Woodgreen Place

50,000

0.0013 %

Director               West Vancouver, BC V7S 2S6



All directors and Officers as a group

100,000

0.0026 %

(1) The beneficial owners of these shares are not known to Avalon Energy Corporation



Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  In accordance with Securities and Exchange Commission rules, shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of the date of the table are deemed beneficially owned by the optionees.  Subject to community property laws, where applicable, the persons or entities named in the table above have sole voting and investment power with respect to all shares of our common stock indicated as beneficially owned by them.



Changes in Control. Our management is not aware of any arrangements which may result in "changes in control" as that term is defined by the provisions of Item 403(c) of Regulation S-B.



B. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



During the period ended March 31, 2006 the Company incurred $3,896 (2005 -$14,111) in management fees to directors. As at March 31, 2006 the Company owes $9,000 in management fees.



During the period ended March 31, 2006, the Company incurred $5,353 (2005 - $5,116) in rent and office expenses to a private company controlled by a shareholder.



During the period ended March 31, 2006, the Company incurred $64,999 (2005 - $235,786) in consulting fees to significant shareholders and $10,420 (2005 - $4,947) in professional fees to employees.



During the period ended March 31, 2006, a company controlled by significant shareholder earned $6,874 (2005 - $4,584) pursuant to prepaid services agreements ..



At March 31, 2006 an amount of $140,846 (2005 - $75,312) is receivable from Golden Spirit.  These amounts are non-interest bearing and have no specific terms of repayment.



15



At March 31, 2006, an amount of $1001 (2005 - $1) is receivable from Legacy Mining Ltd.  These amounts are non-interest bearing and have no specific terms of repayment.





At March 31, 2006, the following amounts are due to related parties:



|                        |   |                |   |                  
|----------------------- | - | -------------- | - | -----------------
|                        |   | March 31,
2006 |   | December 31, 2005
|                        |   |                |   |                  
|Significant shareholder | $ | 96,280         | $ | 68,857           



All related party transactions are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.



C. DESCRIPTION OF PROPERTY.



As of the dates specified in the following table, Avalon Energy Corporation held the following property in the following amounts:



Property



March 31, 2006



December 31, 2005

----------------------------------------------------------------------------------------------------

Cash



US $ 31,938



US $ 41,081



Avalon Energy Corporation defines cash equivalents as all highly liquid investments with a maturity of 3 months or less when purchased. Avalon Energy Corporation does not presently own any interests in real estate. Avalon Energy Corporation does not presently own any inventory or equipment.





ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K



Exhibit 31.1 - Section 906 Certification of Periodic Report of the Chief Executive Officer.



Exhibit 31.2 - Section 906 Certification of Periodic Report of the Chief Financial Officer.



Exhibit 32.1 - Section 302 Certification of Periodic Report of the Chief Executive Officer.



Exhibit 32.2 - Section 302 Certification of Periodic Report of the Chief Financial Officer.



Reports on Form 8-K - None.



SIGNATURES



Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused to be signed on its behalf by the undersigned, whereunto duly authorized.



AVALON ENERGY CORPORATION



Date: May 12, 2006





By: /s/ Robert Klein

---------------------------

Robert Klein





16