U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB



[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007



[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934



For the transition period   from     to



Commission File Number: 0-13597





AVALON ENERGY CORPORATION

(Formerly Avalon Gold Corporation)

(Exact name of registrant as specified in its charter)



NEVADA                                      88-0195105

(State or other jurisdiction of

incorporation or organization)          (I.R.S. Employer Identification No.)



1288 Alberni Street, Suite 806, Vancouver, British Columbia, Canada   V6E 4N5

(Address of registrant's principal executive offices)   (Zip Code)



604.664.0499

(Registrant's Telephone Number, Including Area Code)





APPLICABLE ONLY TO CORPORATE ISSUERS



State the number of shares outstanding of each of the issuer's classes of common

equity, as of the latest practical date.  As of JUNE 30, 2007 there were

51,910,496 shares of the issuer's $0.001 par value common stock issued and

outstanding.



===============================================================



INDEX





PAGE

Part I. FINANCIAL INFORMATION



Item 1.   Financial Statements.........................................

1



Item 2.   Management's Discussion and Analysis or Plan of Operation......

13



Item 3.   Controls And Procedures........................................

20



Part II. OTHER INFORMATION



Item 1.   Legal Proceedings..............................................

20



Item 2.   Changes in Securities and Use of Proceeds......................

21



Item 3.   Defaults Upon Senior Securities................................

23



Item 4.   Submission of Matters to a Vote of Security Holders............

23



Item 5.   Security Ownership of Certain Benifical Owners and Management........

24



Item 6.   Exhibits and Reports on Form 8-K...............................

25



SIGNATURES...............................................................

26



===============================================================

Part I. FINANCIAL INFORMATION

Item 1: Fiancial Statements



AVALON ENERGY CORPORATION

(An Exploration Stage Company)



FINANCIAL STATEMENTS



JUNE 30, 2007

(Unaudited)



AVALON ENERGY CORPORATION

(An Exploration Stage Company)



BALANCE SHEETS



|                                                                                              |                           |                  
|--------------------------------------------------------------------------------------------- | ------------------------- | -----------------
|                                                                                              | June 30,
2007
(unaudited) | December 31,
2006
|                                                                                              |                           |                  
|ASSETS                                                                                       
|                                                                                              |                           |                  
|CURRENT ASSETS                                                                                |                           |                  
|Cash                                                                                          | $       100,241           | $        355,009 
|Accounts Receivable                                                                           | 543                       | -                
|Taxes recoverable                                                                             | 1,565                     | 1,210            
|Due from Legacy Mining Ltd.                                                                   | 21,028                    | 16,360           
|                                                                                              |                           |                  
|                                                                                              | 123,377                   | 372,579          
|                                                                                              |                           |                  
|AVAILABLE FOR SALE SECURITIES  related parties                                               | 24,982                    | 21,112           
|DUE FROM GOLDEN SPIRIT ENTERPRISES LTD.                                                       | 172,138                   | 215,054          
|OIL AND GAS PROPERTIES,(full cost method of accounting, unproven)                             | 1,108,779                 | 1,066,286        
|                                                                                              |                           |                  
|                                                                                              | $      1,429,276          | $      1,675,031 
|                                                                                              |                           |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                         
|                                                                                              |                           |                  
|CURRENT LIABILITIES                                                                           |                           |                  
|Accounts payable and accrued liabilities                                                      | $         36,161          | $          32,553
|Due to related parties                                                                        | 20,666                    | 114,551          
|                                                                                              | 56,827                    | 147,104          
|                                                                                              |                           |                  
|CONTINGENCY                                                                                   |                           |                  
|                                                                                              |                           |                  
|                                                                                              |                           |                  
|STOCKHOLDERS EQUITY                                                                          |                           |                  
|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                                  |                           |                  
|51,910,496 (December 31, 2006  55,200,493) shares issued and outstanding                     | 51,910                    | 55,200           
|Additional paid-in capital                                                                    | 23,538,149                | 23,86,960        
|Deferred Compensation                                                                         | (32,000)                  | (56,798)         
|Share subscriptions Receivable                                                                | (20,000)                  | -                
|Promissory Notes Receivable                                                                   | (160,726)                 | (635,500)        
|Deficit accumulated during the exploration stage                                              | (17,439,707)              | (17,133,413)     
|Deficit accumulated prior to the exploration stage                                            | (4,460,633)               | (4,460,633)      
|Accumulated other comprehensive loss                                                          | (104,544)                 | (108,889)        
|                                                                                              | 1,372,449                 | 1,527,927        
|                                                                                              |                           |                  
|                                                                                              | $     1,429,276           | $    1,675,031   



The accompanying notes are an integral part of these financial statements

2





AVALON ENERGY CORPORATION

(An Exploration Stage Company)



INTERIM STATEMENTS OF OPERATIONS

(Unaudited)



|                                                 |                                  |                                  |                                |                                |                                                 
|------------------------------------------------ | -------------------------------- | -------------------------------- | ------------------------------ | ------------------------------ | ------------------------------------------------
|                                                 | Three Months ended June 30, 2007 | Three Months ended June 30, 2006 | Six Months ended June 30, 2007 | Six Months ended June 30, 2006 | Cumulative from January 1, 1996 to June 30, 2007
|                                                 |                                  |                                  |                                |                                |                                                 
|                                                 |                                  |                                  |                                |                                |                                                 
|EXPENSES                                         |                                  |                                  |                                |                                |                                                 
|Litigation settlement                            | $                -               | $                -               | $               -              | $                -             | $     2,291,070                                 
|Management and consulting fees                   | 200,779                          | 142,453                          | 251,761                        | 161,151                        | 4,519,359                                       
|Consulting fees  stock based compensation       | 4,000                            | 11,000                           | 4,000                          | 61,000                         | 1,855,140                                       
|Exploration costs                                | -                                | -                                | -                              | -                              | 113,678                                         
|Loss on settlement of debt                       | -                                | -                                | -                              | -                              | 718,784                                         
|General and administrative                       | 27,883                           | 22,649                           | 61,037                         | 68,725                         | 2,431,707                                       
|Professional fees                                | 9,314                            | 88,391                           | 19,990                         | 66,428                         | 997,249                                         
|Interest expense                                 | -                                | -                                | -                              | -                              | 98,282                                          
|Software development costs                       | -                                | -                                | -                              | -                              | 737,300                                         
|                                                 |                                  |                                  |                                |                                |                                                 
|LOSS BEFORE THE FOLLOWING                        | 241,976                          | 264,493                          | 336,788                        | 357,304                        | 13,762,569                                      
|                                                 |                                  |                                  |                                |                                |                                                 
|Interest, Royalty and Other Income               | (12,408)                         |                                  | (30,494)                       |                                | (63,087)                                        
|Property option income                           | -                                | -                                | -                              | -                              | (130,000)                                       
|Write-down of investment in Legacy Mining Ltd.   | -                                | -                                | -                              | -                              | 128,288                                         
|Write-down of interest in  ACGT Corporation      | -                                | -                                | -                              | -                              | 2,250,937                                       
|Write-down of interest in oil and gas properties | -                                | -                                | -                              | -                              | 1,406,000                                       
|Loss on Iceberg Drive Inn Investment             | -                                | -                                | -                              | -                              | 85,000                                          
|                                                 |                                  |                                  |                                |                                |                                                 
|NET LOSS FOR THE PERIOD                          | $     (229,568)                  | $     (264,493)                  | $     (306,294)                | $     (357,304)                | $   (17,439,707)                                



|                                           |               |                  |                    |                   
|------------------------------------------ | ------------- | ---------------- | ------------------ | ------------------
|                                           |               |                  |                    |                   
|BASIC NET LOSS PER SHARE                   | $      (0.01) | $         (0.01) | $           (0.01) | $           (0.01)
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | 54,018,185    | 44,060,933       | 54,610,162         | 41,406,570        



The accompanying notes are an integral part of these interim financial statements

3



AVALON ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                            |                                |                                |                                                  
|--------------------------------------------------------------------------- | ------------------------------ | ------------------------------ | -------------------------------------------------
|                                                                            | Six months ended June 30, 2007 | Six months ended June 30, 2006 | Cumulative from January 1, 1996 to June 30 , 2007
|                                                                            |                                |                                |                                                  
|CASH FLOWS FROM OPERATING ACTIVITIES                                        |                                |                                |                                                  
|Net loss                                                                    | $  (306,294)                   | $   (357,304)                  | $ (17,439,707)                                   
|Adjustments to reconcile net loss to net cash used in operating activities: |                                |                                |                                                  
|- fees and services paid for with common shares                             | 57,697                         | 72,246                         | 3,350,803                                        
|- other stock-based compensation                                            | 4,000                          | 61,000                         | 1,855,140                                        
|- interest paid for with common shares                                      | -                              | -                              | 80,872                                           
|- loss on settlement of debt                                                | -                              | -                              | 718,784                                          
|- software development costs paid for with common shares                    | -                              | -                              | 600,000                                          
|- non cash exploration costs                                                | -                              | -                              | 110,000                                          
|- write-down of interest in oil and gas properties                          | -                              | -                              | 1,406,000                                        
|- write-down of investment in Legacy Mining Ltd.                            | -                              | -                              | 128,288                                          
|- write-down of interest in ACGT Corporation                                | -                              | -                              | 2,250,937                                        
|- loss on Iceberg Drive Inn investment                                      | -                              | -                              | 85,000                                           
|- (Gain)/loss on sale of securities held for resale                         | (275)                          | -                              | (275)                                            
|- non cash option income received in shares                                 | -                              | -                              | (130,000)                                        
|- interest accrued on promissory notes receivable                           | (10,726)                       | -                              | (26,226)                                         
|- other non-cash expenses                                                   | -                              | -                              | 2,557,382                                        
|- net changes in working capital items                                      | 2,710                          | 5,872                          | 288,534                                          
|CASH FLOWS USED IN OPERATING ACTIVITIES                                     | (252,888)                      | (218,186)                      | (4,164,468)                                      
|                                                                            |                                |                                |                                                  
|                                                                            |                                |                                |                                                  
|CASH FLOWS FROM INVESTING ACTIVITIES                                        |                                |                                |                                                  
|Interest received on promissory notes receivable                            | 15,500                         | -                              | 15,500                                           
|Investment in Iceberg Acquisition Corporation                               | -                              | -                              | (120,000)                                        
|Proceeds from sale of securities  related party                            | 750                            | -                              | 750                                              
|Interest in oil and gas properties, net of finders fees                     | (42,493)                       | (7,458)                        | (1,529,711)                                      
|CASH FLOWS USED IN INVESTING ACTIVITIES                                     | (26,243)                       | (7,458)                        | (1,633,461)                                      
|                                                                            |                                |                                |                                                  
|CASH FLOWS FROM FINANCING ACTIVITIES                                        |                                |                                |                                                  
|Net proceeds on sale of common stock                                        | 80,000                         | 715,545                        | 4,247,445                                        
|Net proceeds from common stock subscriptions                                | -                              | -                              | 633,000                                          
|Net advances (to) from related parties                                      | (55,637)                       | 17,629                         | 597,725                                          
|Advances receivable                                                         | -                              | -                              | 420,000                                          
|CASH FLOWS PROVIDED BY FINANCING ACTIVITIES                                 | 24,363                         | 733,174                        | 5,898,170                                        
|                                                                            |                                |                                |                                                  
|NET INCREASE (DECREASE) IN CASH                                             | (254,768)                      | 507,531                        | 100,241                                          
|                                                                            |                                |                                |                                                  
|CASH, BEGINNING OF PERIOD                                                   | 355,009                        | 41,081                         | -                                                
|                                                                            |                                |                                |                                                  
|CASH, END OF PERIOD                                                         | $     100,241                  | $     548,612                  | $    100,241                                     

Supplemental cash flow information (See Note 8)



The accompanying notes are an integral part of these financial statements



4



AVALON ENERGY CORPORATION

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

June 30, 2007

(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.  In accordance with SFAS #7, 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 and has incurred losses of $21,900,340 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, 2006 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 six month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.



Reclassifications - Certain reclassifications have been made to the 2006 financial statement amounts to conform to the 2007 financial statement presentation.



5



Stock-Based Compensation



On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123(R), Share-Based Payment,(SFAS 123R).  Prior to January 1, 2006, the Company accounted for share-based payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation(SFAS 123).  In accordance with APB 25, no compensation cost was required to be recognized for options granted to employees that had an exercise price equal to the market value of the underlying common stock on the date of grant.

The Company adopted SFAS 123R using the modified-prospective-transition method.  Under this method, compensation cost recognized for the year ended December 31, 2006 includes: a) compensation cost for all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.  Compensation cost for all periods subsequent to December 31, 2006 includes the estimated fair value of all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R  In addition, deferred stock compensation related to non-vested options is required to be eliminated against additional paid-in capital upon adoption of SFAS 123R.  The results for the prior periods have not been restated.



The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force (EITF) in Issue No. 96-18.  Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable.  The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.

Recent Accounting Pronouncements



In 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No  109 Accounting for Income Taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS 109.  FIN 48 also 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 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company adopted FIN 48 as of January 1, 2007, as required.



There were no interest or general and administrative expenses accrued or recognized related to income taxes for the six months ended June 30, 2007.  The Company has not taken a tax position that would have a material effect on the financial statements or the effective tax rate for the six months ended June 30, 2007 or during the prior three years applicable under FIN 48.  It is determined not to be reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within 12 months of the adoption of FIN 48.  The Company is currently subject to a three year statute of limitations by major tax jurisdictions.



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing the impact of SFAS No. 159 on its financial position and results of operations.



6



NOTE 3  AVAILABLE-FOR-SALE SECURITIES  RELATED PARTIES



Golden Spirit

During 2004, the Company received 111,111 restricted Rule 144 shares of Golden Spirit Enterprises 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.



Effective December 31, 2004 the Company recorded, as other comprehensive loss for the year, a $10,000 unrealized loss in the carrying value of its shares of Golden Spirit.  During the years ended December 31, 2005 and 2006 the Company recorded additional unrealized losses in the carrying value of its shares of Golden Spirit totalling $90,000 and $8,889 respectively, which were recorded as other comprehensive loss for those years.  During the six months ended June 30, 2007, the Company sold 2,500 shares resulting in a realized gain of $275 and recorded an additional unrealized gain of $4,345. As a result, the carrying value of the available for sale shares of Golden Spirit is $24,982 as at June 30, 2007 (December 31,2006 - $21,111).



Legacy

During 2003 the Company settled an outstanding debt receivable of $122,988 from Legacy Mining Ltd. (Legacy) for the issue of 1,229,880 restricted shares of Legacy representing a then 9.8% interest in Legacy. During 2004, the Company wrote this investment down to $1 because management determined that it was not recoverable within a reasonable period of time.

Legacy is a non-reporting entity with a director in common and is intends to become a fully reporting company in the USA and seek a listing on the OTCBB.  On December 12, 2006, Legacy filed a Form SB-2 Registration Statement with the United States Security Commission. Following a number of amendments, the SB-2/A was declared effective on August 3, 2007.



NOTE 4  OIL AND GAS PROPERTIES



Oil and gas properties include the following:

|                                                                       |                  |             
|---------------------------------------------------------------------- | ---------------- | ------------
|                                                                       | June 30 ,        | December 31,
|                                                                       | 2007
(unaudited) | 2006        
|Acquisition and exploration costs, unproved, not subject to depletion. | $  1,108,777     | $  1,066,286
|                                                                       |                  |             



7



The Company's oil and gas activities are currently conducted in the United States. The following is a description 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 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 June 30, 2007, the Company has spent a total of $93,018 (December 31, 2006 - $50,525) on the initial exploration of the property.



8

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.



On November 1, 2006, the Company entered into an agreement with 1063244 Alberta Ltd., (1063244), a private company owned by an individual who is in management of the Company, with a two year term, whereby the company will provide consulting services to the Company (valued at $48,000) in exchange for 480,000 restricted shares of the Company's common stock. The consultant will provide Corporate business development and strategy for the Company in connection with the Company's oil & gas exploration and development in the Uinta Basin, Utah.



The Company has been amortizing the costs of these services over the respective terms of the contracts.  At June 30, 2007, the unamortized portion of the deferred compensation totalled $32,000 (December 31, 2006 - $56,798).



NOTE 6 - STOCKHOLDERS EQUITY

(1)   2007 Stock Transactions

During the six months ended June 30, 2007:



(a) The Company issued 10,000 common shares valued at $900 pursuant to a Consulting Agreement with a member of its Advisory Board to perform a minimum of two days consulting services during the period January 15, 2007 to February 15, 2007.



(b) The Company issued 400,000 restricted common shares valued at $32,000 pursuant to a Consulting Agreement with a non-related individual dated June 12, 2007, for ongoing consulting services provided to the Company.



(c) The Company issued a total of 800,000 common shares pursuant to the Companys 2005 Stock Incentive and Option Plan at $0.10 per share for total proceeds of $80,000.



(d) The Company issued a total of 200,000 common shares pursuant to the Companys 2006 Stock Incentive and Option Plan at $0.10 per share for total proceeds not yet received of $20,000. (See Note 10)



9



(2)2007 - Stock Options





(a)

On October 2, 2006, the Company issued 5,775,000 common shares from the exercise of options pursuant to option grants under the Companys 2005 Stock Option and Incentive Plan and 425,000 common shares from the exercise of options pursuant to option grants under the Companys 2006 Stock Option and Incentive Plan.  All shares were issued at an exercise price of $0.10 per share. As consideration, the Company issued promissory notes to the optionees totalling $620,000. The promissory notes were repayable in six months and bear interest at 10%. The Company received $15,500 in interest during the three months ended June 30, 2007 and has recorded $10,726 in additional accrued interest on the promissory notes. During the period, three of the four optionees elected to return their shares to the Company for cancellation. A total of 4,700,000 shares were returned to the Company for cancellation. The remaining promissory note for 1,500,000 shares valued at $150,000 (excluding accrued interest of $10,726) has been extended to October 2, 2007.



(b)

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 during 2006                           | 6,800,000         | 0.10                            | 5 years                                    
|Exercised during 2006                         | (6,800,000)       | -                               |                                            
|Granted during 2007                           | 200,000           | 0.10                            | 5 years                                    
|Exercised during 2007                         | (200,000)         | -                               |                                            
|Balance, December 31, 2006 and June 30, 2007. | -                 | $                         -     | -                                          



(c)

On September 29, 2006, the Company filed a Registration Statement on Form S-8 to cover up to 4,200,000 shares of common stock to be issued pursuant to the Companys 2006 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.

10



(d)

As of June 30, 2007, there were 3,575,000 stock options available for grant under the Companys 2006 Stock Incentive and Option Plan.





NOTE 7  RELATED PARTY TRANSACTIONS



During the six months ended June 30, 2007, the Company incurred $12,135 (2006 -$8,790) in management fees to directors. As at June 30, 2007 the Company owes $9,000 in management fees.



During the six months ended June 30, 2007, the Company incurred $10,666 (2006 - $10,933) in rent and office expenses to a private company controlled by a shareholder.



During the six months ended June 30, 2007, the Company incurred $47,999 (2006 - $101,498) in consulting fees, the majority of it which is to a shareholder which is part of management and $4,727 (2006 - $8,514) in professional fees to employees.





During the six months ended June 30, 2007, two companies controlled by significant shareholders earned $22,506 (2006 - $13,998) and a company controlled by a shareholder earned $2,292 (2006 - $13,748) from the Company, pursuant to prepaid services agreements.



At June 30, 2007, an amount of $172,138 (December 31, 2006 - $215,054) was receivable from Golden Spirit.  These amounts are non-interest bearing and have no specific terms of repayment.



At June 30, 2007, an amount of $21,028 (December 31,2006 - $16,360) was receivable from Legacy Mining Ltd.  These amounts are unsecured, non-interest bearing and have no specific terms of repayment.



At June 30, 2007, the following amounts are due to related parties:



|                         |   |               |   |                  
|------------------------ | - | ------------- | - | -----------------
|                         |   | June 30,
2007 |   | December 31, 2006
|                         |   |               |   |                  
|Director                 | $ | 9,000         | $ | 9,000            
|Significant shareholders |   | 11,666        |   | 105,551          
|                         | $ | 20,666        | $ | 114,551          

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.



11



NOTE 8  SUPPLEMENTAL CASH FLOW INFORMATION



|                                 |                                |                               
|-------------------------------- | ------------------------------ | ------------------------------
|                                 | Six months ended
June 30, 2007 | Six months ended
June 30, 2006
|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 June 30, 2007, the Company is still in the process of having the certificates released.



NOTE 10  TRANSACTION WITH PROMOTER



On  May 2, 2007, the Company signed an agreement with Yes International (Yes) for investor relations services. Under the terms of the six month agreement, the Company was required to pay Yes $2,800 per month and issue Yes 65,000 restricted common shares valued at $5,200. The Company paid $5,600 in investor relations fees during the period and cancelled the contract after two months. It was agreed by the parties that no share consideration would be due.



NOTE 11  SUBSEQUENT EVENTS



On July 5, 2007, the Company issued a total of 50,000 common shares pursuant to the Companys 2005 Stock Incentive and Option Plan at $0.10 per share for total proceeds of $5,000.

Subsequent to June 30, 2007, the Company placed on stop transfer on a total of 1,000,000 shares valued at $125,000 previously issued to two consultants until management is satisfied with the performance of the Consultants earning these shares. The Company will determine in the next quarter if these shares are to be released or returned to the Company for cancellation and return to treasury.



12

ITEM 2. PLAN OF OPERATION:



THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF OUR 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. Our Company, 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



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



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Under former management, in 1987, we announced our 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. Our Company, Avalon Energy Corporation, was an inactive shell corporation from 1991 to December 1995, when we 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, we 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 us 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.



We spent U.S. $737,300 to develop the scalable server platform. However, with the sharp decline in the Internet industry, we decided to abandon the project. The costs associated with this project were expensed.  During that time our Company was reconsidering our Internet-related activities, we 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, we 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 we, the management of the Company, decided to pursue mineral properties and oil and gas interests.



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.



14



The Company has spent a total of $970,279 in acquisition costs and $114,622 in development costs on the Uinta property to date. On January 4, 2007, the USDA Forest Service decided to allow Avalon Energy to conduct their first proposed seismic exploration project. Avalons project would consist of approximately 7 miles of 2D seismic exploration in the Strawberry Peak and Shotgun Draw area of the South Unit of the Ashley National Forest.  Due to seasonal access constraints, it is expected that the project would not begin until summer of 2007.  Recording sensors would be placed along the seismic lines every 22 feet, with surface cables connecting the sensors to a central recording station (large truck).  Recording sensors consist of a small microphone, attached to a metal stake.  Shot-holes would also be drilled along the seismic line, every 330 feet, to a depth of about 60 feet.  Drill holes would be loaded with a small explosive charge, backfilled with cuttings and swelling clays, and then shot to produce seismic energy.  Drilling of the shot holes would be conducted using small portable drilling rigs, transported from site to site by either buggy or helicopter.  Along existing roads, buggy drills would be used, whereas helicopter drills would be used on steep topography away from existing roads. Access to the seismic line off of existing roads would be by helicopter, by foot, or by ATV.  No new roads would be required, and no vegetation would need to be cleared or removed.  After completion, all recording sensors and surface cables would be removed.  The entire operation is expected to last about 10 days. The Company has accepted a bid from CGG Veritas of Houston to complete the first seismic line. Preparations for the Vibrator Seismic Shoot continue on schedule with the surveying work having been completed the week of August 6, 2007.  The vibrator seismic line will be shot under the direction of Veritas DGC Land Inc of Denver covering eight miles along the forest road.  The line travels in an east west direction over the southwestern edge of the property and after cutting the north-west regional fault, swings north-north-east along Twelve Hundred Dollar Ridge spanning the property in that direction and crossing two of the three well locations. This ridge is sub-parallel to the north-south regional fault which also represents possible stratigraphic closure for shallower target horizons.



The permitting work for the three well sites is now well advanced with site plats completed and critical decisions being finalized as to pad locations and disturbance levels. The planning for upgrading the access road and drilling a water supply well is at an advanced stage.



The Environmental Assessment is well underway and a first draft has been delivered to the Ashley National Forest.  Field work on wildlife populations has been conducted throughout the spring and early summer.  Necessary archaeological work was completed last year on both the seismic lines and the three well sites.  This was done under the direct management and supervision of the Ashley National Forest.



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.



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.



15





During 2004, the Company received 111,111 restricted Rule 144 shares of Golden Spirit Enterprises 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.



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.



Derek Oil and Gas Corporation, a public company and the operator, now holds a 95% working interest in the LAK Ranch project and is the project operator. The LAK Ranch Project is a strong fit for Derek's corporate focus of using enhanced oil recovery (EOR) techniques to develop new production from reservoirs in North America. Derek and its partner, SEC Oil and Gas Partnership are confident in the ability of Derek's management to drive this project forward as promptly as possible in 2007.



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.



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. 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.

During the year ended December 31, 2004, there was no production from the Wyoming property.



The Company has received $5,380 in oil royalties in the year 2006. No royalties were received in the first quarter of 2007.



As of the date of this report, the current status of the project is as follows:



The first well of a 12 well program was spudded on Monday, March 5 and Derek has successfully finished drilling, casing and cementing all twelve wells of its current development program at their LAK Ranch project. In addition, the Wyoming Oil & Gas Conservation Commission has approved permits for temporary injection into the eight producer wells (for up to three weeks of injection) and for permanent injection into the four injection wells. The completed 12 vertical well program totaled a depth of approximately 13,540 feet. The program consists of a pattern of four injector and eight producer wells targeted to produce from the Newcastle sandstone formation. Well placements were selected based on targets identified using Derek's $1.1 million USD, high definition 3D seismic survey completed over 2880 acres (4 1⁄2 square miles) of the 8000 plus acre LAK Ranch property. Within the program area, the pay zone is estimated to be 40 to 70 feet thick.
This 12 well program is being conducted jointly with a third party on a fifty-fifty cost basis, with the third party receiving fifty percent of the revenue until payback on their initial investment is met. Once payback is met, the third party's revenue interest (only on the 12 well program production) will revert to forty percent. Derek will have a 95% working interest in any current and future development and production on the property outside this 12 well program area.



16

Update as of June 30, 2007:

-

Successfully tested an economically viable EOR to extract the viscous oil

-

Derek's consultants Peterson Energy Management, Inc., SI International, Inc. & Pacific Geotechnical Associates, Inc. continue to assist in the development of the project

-

12 wells have been completed

-

Fiber optic system has been invaluable in monitoring the reservoir temperature

-

Derek has signed a new contract for oil sales which ties the price received to West Texas Intermediate (WTI)

-

Steaming has commenced in a portion of the newly developed 12 well program

-

Multiple deeper targets for future development have been identified in the 3D seismic interpretation by Derek's consultants



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 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  Related Parties



Golden Spirit

During 2004, the Company received 111,111 restricted Rule 144 shares of Golden Spirit Enterprises 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.



17



Effective December 31, 2004 the Company recorded, as other comprehensive loss for the year, a $10,000 unrealized loss in the carrying value of its shares of Golden Spirit.  During the years ended December 31, 2005 and 2006 the Company recorded additional unrealized losses in the carrying value of its shares of Golden Spirit totalling $90,000 and $8,889 respectively, which were recorded as other comprehensive loss for those years.  During the quarter ended June 30, 2007, the Company sold 2,500 shares resulting in a realized gain of $165 and recorded an additional unrealized gain of $4,345. As a result, the carrying value of the available for sale shares of Golden Spirit is $24,982 as at June 30, 2007 (December 31,2006 - $21,111).



Legacy

During 2003 the Company settled an outstanding debt receivable of $122,988 from Legacy Mining Ltd. (Legacy) for the issue of 1,229,880 restricted shares of Legacy representing a then 9.8% interest in Legacy. During 2004, the Company wrote this investment down to $1 because management determined that it was not recoverable within a reasonable period of time.



Legacy is a non-reporting entity with a director in common and is intends to become a fully reporting company in the USA and seek a listing on the OTCBB.  On December 12, 2006, Legacy filed a Form SB-2 Registration Statement with the United States Security Commission. Following a number of amendments, the SB-2/A was declared effective on August 3, 2007.



Liquidity and Capital Resources.



For the six month period ended June 30, 2007, we had total assets of $1,429,276, including cash of $100,241, accounts receivable of $543 and taxes recoverable of $1,565.  We have $1,108,779 invested in oil and gas properties, which is represented by $1,108,777 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 $24,982 as at June 30, 2007, a long-term investment in Legacy Mining Ltd. recorded at a nominal value of $1 and a long-term receivable from Golden Spirit Enterprises Ltd. at a value of $172,138. The decrease in assets was primarily due cash expenditures on various consulting fees to both related and unrelated parties.



At June 30, 2007, we had current liabilities of $56,827, which was represented by accounts payable and accrued liabilities of $36,161 and $20,666 due to related parties. As of December 31, 2006 we had current liabilities of $147,104. The decrease in liabilities was a result of payments made to decrease accounts payable and due to related parties.  At June 30, 2007, we had working capital of $66,550. (December 31, 2006 - $255,475).



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.



18



Results of Operations



We have not yet realized any revenue from operations to date. Loss from operations for the three month period ended June 30, 2007 was $229,568 (2006 - $264,493).  Loss from operations for the six month period ended June 30, 2007 was $306,294 (2006 - $357,304).   This decrease in loss was due to a decrease in stock based compensation expenses and professional expenses.



From inception to June 30, 2007 our Company has incurred cumulative net losses of $21,900,340 resulting primarily from the write-down of $1,406,000 in its interests in oil and gas properties, write-down of $2,250,937 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 $4,519,359; office and general expenses of $2,431,707; professional fees of $997,249; 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 Enterprises Ltd. (See Part I, Utah property) and $63,087 in interest and royalty income.



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 do anticipate that we will need to raise additional capital within the next 12 months in order to continue as a going concern.  In May, 2006, the Company raised $648,545 net funding through a private placement ($800,000 gross) 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.



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 is presently in the midst of 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.



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 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 the third quarter of 2007, the Companys plan to perform a 2-D seismic line on our Shotgun Draw, Uinta Basin prospect is estimated at a cost of $200,000 - $300,000USD.



Off-Balance Sheet Arrangements



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



Recent Accounting Pronouncements



In 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No  109 Accounting for Income Taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS 109.  FIN 48 also 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 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company adopted FIN 48 as of January 1, 2007, as required.



There were no interest or general and administrative expenses accrued or recognized related to income taxes for the six months ended June 30, 2007.  The Company has not taken a tax position that would have a material effect on the financial statements or the effective tax rate for the six months ended June 30, 2007 or during the prior three years applicable under FIN 48.  It is determined not to be reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within 12 months of the adoption of FIN 48.  The Company is currently subject to a three year statute of limitations by major tax jurisdictions.





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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing the impact of SFAS No. 159 on its financial position and results of operations.



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, 2007 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 2007 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, we 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 we 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, we commenced court proceedings against the principals of Empire Sterling Corporation. Our 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. We continued to file legal process claiming ownership of the shares and breach of trust inter alia. Our Company was successful and has now applied to have the share certificate released and subsequently cancelled.  As at June 30, 2007, we are still in the legal process of having the certificate released.



20



ITEM 2 CHANGES IN SECURITIES



(1)   2007 Stock Transactions



During the six months ended June 30, 2007:



(a) The Company issued 10,000 common shares valued at $900 pursuant to a Consulting Agreement with a member of its Advisory Board to perform a minimum of two days consulting services during the period January 15, 2007 to February 15, 2007.



(b) The Company issued 400,000 restricted common shares valued at $32,000 pursuant to a Consulting Agreement with a non-related individual dated June 12, 2007, for ongoing consulting services provided to the Company.



(c) The Company issued a total of 800,000 common shares pursuant to the Companys 2005 Stock Incentive and Option Plan at $0.10 per share for total proceeds of $80,000.



(d) The Company issued a total of 200,000 common shares pursuant to the Companys 2006 Stock Incentive and Option Plan at $0.10 per share for total proceeds not yet received of $20,000.



(2)

2007 - Stock Options



(a)

On October 2, 2006, the Company issued 5,775,000 common shares from the exercise of options pursuant to option grants under the Companys 2005 Stock Option and Incentive Plan and 425,000 common shares from the exercise of options pursuant to option grants under the Companys 2006 Stock Option and Incentive Plan.  All shares were issued at an exercise price of $0.10 per share. As consideration, the Company issued promissory notes to the optionees totalling $620,000. The promissory notes were repayable in six months and bear interest at 10%. The Company received $15,500 in interest during the three months ended June 30, 2007 and has recorded $10,726 in additional accrued interest on the promissory notes. During the period, three of the four optionees elected to return their shares to the Company for cancellation. A total of 4,700,000 shares were returned to the Company for cancellation. The remaining promissory note for 1,500,000 shares has been extended to October 2, 2007.



(b)

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 during 2006                           | 6,800,000         | 0.10                            | 5 years                                    
|Exercised during 2006                         | (6,800,000)       | -                               |                                            
|Granted during 2007                           | 200,000           | 0.10                            | 5 years                                    
|Exercised during 2007                         | (200,000)         | -                               |                                            
|Balance, December 31, 2006 and June 30, 2007. | -                 | $                        -      | -                                          



21



(c)

On September 29, 2006, the Company filed a Registration Statement on Form S-8 to cover up to 4,200,000 shares of common stock to be issued pursuant to the Companys 2006 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.



(d)

As of June 30, 2007, there were 3,575,000 stock options available for grant under the Companys 2006 Stock Incentive and Option Plan.



2006 Stock Transactions



During the period ended June 30, 2006, the Company issued a total of 600,000 common shares pursuant to the Companys 2005 Stock Incentive and Option Plan at prices ranging from $0.11 per share to $0.12 per share for total proceeds of $67,000.



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



On May 17, 2006, the Company completed a private placement and issued 8,000,000 Series A Units at $0.10 per unit for gross proceeds of $800,000 ($648,585 net of issuance costs).  Each Series A Unit consist of (i) one restricted share of the Company's common stock and (ii) on half of a Series "A" warrant with each whole Series A warrant entitling the subscriber to acquire one share of the Company's common stock at a purchase price of $0.20 per share for a period of eighteen months.  A finders' fee of 15% of the total proceeds was paid in the form of 1,200,000 restricted shares of the Companys common stock. On July 14, 2006, the Company filed a Form SB-2 Registration Statement with the Securities and Exchange Commission in accordance with the requirements of the Placement Agency Agreement.  The Company registered a total of 13,200,000 shares of common stock being the 8,000,000 subscriber shares, the 1,200,000 finders shares and 4,000,000 shares underlying the subscriber Series A warrants.



On May 23, 2006, the Company issued 50,000 restricted common shares with a fair value of $7,500 to a consultant for services related to the Uinta Basin Prospect and for services as a member of the Companys advisory board.



On May 25, 2006, the Company issued 500,000 restricted common shares with a fair value of $75,000 pursuant to a consulting agreement for corporate finance services. A further 500,000 restricted common shares will be issued, to be held in escrow, following mutual agreement to retain the consultants services after a three-month period. After six months, and by mutual consent to continue services, the Company will issue 166,666 restricted common shares each month for six months to the consultant.



2006 - Stock Options



(a) The fair value of the common stock options granted during the period was estimated 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         | 4.88%
|Expected volatility             | 153% 
|Expected option life (in years) | 5    



22



(b) During the three months ended March 31, 2006 we 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.  We recognized   stock-based compensation of $50,000, which represented the fair value of shares issued for consulting   services rendered by consultants to us.  As at March 31, 2006, there are 5,875,000 stock options available for grant.



(c) During the three months ended June 30, 2006, the Company granted a total of 100,000, five year common stock options at an exercise price of $0.12.  The Company recognized stock-based compensation of   $11,000, which represented the estimated fair value of these stock options.



(d)  As of June 30, 2006, there were 5,775,000 stock options available for grant under the  Companys 2005 Stock Incentive and Option Plan.



(e) Our 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        | 600,000           | 0.11                              | 5 years                                    
|Exercised during 2006      | (600,000)         | -                                 |                                            
|Balance June 30, 2006      | -                 | $                         -       | -                                          





ITEM 3.   Defaults Upon Senior Securities



None



ITEM 4. Submission of Matters to Vote of Security Holders



None.



23



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



The following table sets forth information as of June 30, 2007, with respect to the ownership of our Company's common stock by each person known by us to be the beneficial owner of more than five percent (5%) of our 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

36,567,368 (1)

66.23 %



PO Box 222 Bowling Green Stn.



New York, NY 10272



Carlton Parfitt

9560 Parksville Drive

50,000

0.0010 %

Director

Richmond, BC V7E 4M9



Robert Klein

429 West 41st Avenue

50,000

0.0010 %

Persident/Director             Vancouver, BC V5Y 2S6



All directors and Officers as a group

100,000

0.0020 %



(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 that may result in "changes in control" as that term is defined by the provisions of Item 403(c) of Regulation S-B.



24

B. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



During the six months ended June 30, 2007, the Company incurred $12,135 (2006 -$8,790) in management fees to directors. As at June 30, 2007 the Company owes $9,000 in management fees.



During the six months ended June 30, 2007, the Company incurred $10,666 (2006 - $10,933) in rent and office expenses to a private company controlled by a shareholder.



During the six months ended June 30, 2007, the Company incurred $47,999 (2006 - $101,498) in consulting fees, the majority of it which is to a shareholder which is part of management and $4,727 (2006 - $8,514) in professional fees to employees.



During the six months ended June 30, 2007, two companies controlled by significant shareholders earned $22,506 (2006 - $13,998) and a company controlled by a shareholder earned $2,292 (2006 - $13,748) from the Company, pursuant to prepaid services agreements.



At June 30, 2007, an amount of $172,138 (December 31, 2006 - $215,054) was receivable from Golden Spirit.  These amounts are non-interest bearing and have no specific terms of repayment.



At June 30, 2007, an amount of $21,028 (December 31, 2006 - $16,360) was receivable from Legacy Mining Ltd.  These amounts are unsecured, non-interest bearing and have no specific terms of repayment.



At June 30, 2007, the following amounts are due to related parties:

|                         |   |               |   |                  
|------------------------ | - | ------------- | - | -----------------
|                         |   | June 30,
2007 |   | December 31, 2006
|                         |   |               |   |                  
|Director                 | $ | 9,000         | $ | 9,000            
|Significant shareholders |   | 11,666        |   | 105,551          
|                         | $ | 20,666        | $ | 114,551          



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.



25

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

June 30, 2007

December 31, 2006

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

Cash

$ 100,241

$ 355,009



Avalon Energy Corporation defines cash equivalents as all highly liquid investments with 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.



D. TRANSACTIONS WITH PROMOTERS



On May 2, 2007, the Company signed an agreement with Yes International (Yes) for investor relations services. Under the terms of the six month agreement, the Company was required to pay Yes $2,800 per month and issue Yes 65,000 restricted common shares valued at $5,200. The Company paid $5,600 in investor relations fees during the period and cancelled the contract after two months. It was agreed by the parties that no share consideration would be due.



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: August 14, 2007

By: /s/ Robert Klein

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

Robert Klein

26