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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended
    December 31, 2006ORo

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: 001-32629
 AVALON PHARMACEUTICALS,
    INC.
 (Exact name of Registrant as
    specified in its charter)
  Delaware

52-2209310(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)20358 Seneca Meadows
    Parkway,
    Germantown, Maryland

20876(Zip Code)(Address of principal executive
    offices)   Registrants telephone number, including area code:
 (301) 556-9900
  Securities registered pursuant to Section 12 (b) of the
    Act:
 Common Stock, par value $0.01 per share
  Securities registered pursuant to Section 12 (g) of the
    Act:
    None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ
      Class

Outstanding on March 15, 2007Common Stock, par value
    $0.01 per share


13,144,171 shares   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF
    CONTENTS
  
  Part No.

Item No.

Description

Page No.I



1


BUSINESS


31A


RISK
    FACTORS


151B


UNRESOLVED STAFF
    COMMENTS


282


PROPERTIES


293


LEGAL
    PROCEEDINGS


294


SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


29II



5


MARKET FOR THE
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF EQUITY SECURITIES


296


SELECTED FINANCIAL
    DATA


327


MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS


337A


QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


408


FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA


419


CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


619A


CONTROLS AND
    PROCEDURES


619B


OTHER
    INFORMATION


61III



10


DIRECTORS AND
    EXECUTIVE OFFICERS OF THE REGISTRANT


6111


EXECUTIVE
    COMPENSATION


6212


SECURITY OWNERSHIP
    OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


6213


CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS


6214


PRINCIPAL
    ACCOUNTANT FEES AND SERVICES


62IV



15


EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES


62Exhibit 10.6BExhibit 10.7BExhibit 10.8BExhibit 10.9BExhibit 10.10 (B)Exhibit 10.11BExhibit 10.23EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1    Form 10-K,
 1




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Cautionary
    Advice Regarding Forward-Looking Statements
  Form 10-K Form 10-K
    
    risks relating to the early stage of product candidates under
    development;
    risks relating to our ability to secure and maintain
    relationships with collaborators;
    uncertainties with, and unexpected results and related analyses
    relating to clinical trials of our product candidates;
    the timing and content of future U.S. Food and Drug
    Administration regulatory actions;
    dependence on efforts of third parties;
    dependence on intellectual property;
    risks that we may lack the financial resources and access to
    capital to fund our operations; and
    risks relating to the commercialization, if any, of our product
    candidates (such as marketing, regulatory, patent, product
    liability, supply, competition and other risks).   2




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PART I ITEM 1.  BUSINESS  Overview
  first-in-class ®
        ® ® ®
 3




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Our Drug
    Discovery and Development Programs
    Program

Status

Planned 2007 Activities

Commercial RightsIMPDH Inhibitor
    (AVN944)

U.S. Phase I ongoing

Phase II hematologic cancer
    studies; 
    Phase II solid tumor study

Avalonβ-catenin Pathway Inhibitors

Lead optimization

Optimize and select a candidate
    for preclinical development

AvalonAurora Pathway
    Inhibitors

Lead optimization

Optimize and select a candidate
    for preclinical development

AvalonSurvivin Pathway
    Inhibitors

Lead Identification

Select compound series for
    optimization

AvalonMyc Pathway
    Inhibitors

Lead Identification

Select compound series for
    optimization

AvalonTherapeutic Antibodies

Novel target identified

Identify active antibodies

Avalon/Medarex   AVN944
    Program
    ®
  β-Catenin
    Program
  ®
 4




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Aurora
    Pathway Program
  ® in vitro
  Survivin
    Program
    Myc
    Program
    Therapeutic
    Antibodies
  ® in vivo
  Our
    Technologies
  ® ®
  ®
  ®
 5




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##### Table of Contents



®
  ®
  ® de novo ®
  Our
    Strategy
    
    Advance the development of AVN944, our clinical stage, pan
    cancer candidate.  We began conducting a
    U.S. Phase I trial for AVN944 in hematologic cancer
    patients in January 2006. We plan to initiate Phase II
    clinical trials in solid tumors and hematologic malignancies
    during  2007. During the clinical development of AVN944 and the
    development of all of our subsequent drug candidates, we intend
    to leverage
    AvalonRx®
    to accelerate decision-making by: (1) selecting biomarkers
    of responsive cancers, (2) identifying responsive patient
    populations for improved clinical trial design and outcome, and
    (3) determining appropriate drug combinations more quickly
    than with conventional methods.
    Advance our internal anti-cancer therapeutic
    programs.  We plan to advance the development of
    our lead candidates in both the β-catenin and the Aurora
    pathway programs to select and optimize pre-clinical candidates
    for both programs and to advance those candidates to clinical
    trials. We also plan to advance the Survivin pathway and the Myc
    pathway programs from the screening stage to the lead
    optimization stage and to identify lead candidates for both
    programs. We will continue to utilize
    AvalonRx®
    to discover and develop new therapeutic candidates against
    proprietary Avalon cancer targets and well-known cancer pathways
    proven to be difficult for conventional technologies to address.
    Continue to deliver value for our partners and create new
    valuable partnerships.  We have formed
    collaborations with Merck & Co., Inc., MedImmune, Inc.,
    Novartis Institutes for Biomedical Research, Inc., Medarex, Inc.
    and ChemDiv, Inc. We will continue to deliver value to our
    partners by using
    AvalonRx®
    to discover and develop compounds together with our partners. We
    may form new partnerships involving some of our cancer pipeline
    programs that would: (1) enhance clinical development and
    maximize the potential therapeutic use and commercialization of
    AVN944; (2) enhance the development and maximize the
    potential therapeutic use and commercialization of our
    β-catenin, Aurora pathway, Myc and Survivin pathway
    programs; (3) discover, develop and commercialize novel
    drug candidates for other undruggable targets. Additionally, we
    may form new partnerships utilizing
    AvalonRx®
    as it has very broad applications across many therapeutic fields. 6




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Collaborative
    Relationships
  Merck &
    Co., Inc.
    ®
    first-in-class
  MedImmune
  ®
       7




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Medarex
  ®
  ChemDiv,
    Inc.
  ® tm
    Novartis
  ®
    ®
 8




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Other
    Collaborations
      Patents,
    Licenses and Proprietary Rights
    Vertex
    license
         9




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Patent
    rights; licenses
        
    obtain patents to protect our own products;
    obtain licenses to use the technologies of third parties, which
    may be protected by patents;
    protect our trade secrets and know-how; and
    operate without infringing the intellectual property and
    proprietary rights of others.  Trade
    secrets
    Competition
        Manufacturing
    and Supply
   10




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Marketing
    and Sales
    Government
    Regulation
    Pharmaceutical
    Product Regulation
      
    Preclinical Phase.  The preclinical phase
    involves the discovery, characterization, product formulation
    and animal testing necessary to prepare an IND for submission to
    the FDA. The IND must be accepted by the FDA before the drug can
    be tested in humans. The review period for an IND submission is
    30 days, after which, if no comments are made by the FDA,
    the product candidate can be studied in Phase I clinical
    trials. Certain preclinical tests must be conducted in
    compliance with the FDAs good laboratory practice
    regulations and the United States Department of
    Agricultures Animal Welfare Act.
    Clinical Phase.  The clinical phase of
    development follows a successful IND submission and involves the
    activities necessary to demonstrate the safety, tolerability,
    efficacy, and dosage of the drug in humans, as well as the
    ability to produce the drug in accordance with cGMP
    requirements. Clinical trials are conducted under 11




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protocols detailing, among other things, the objectives of the
    study and the parameters to be used in assessing the safety and
    the efficacy of the drug. Each protocol must be submitted to the
    FDA as part of the IND prior to beginning the trial. Each trial
    must be reviewed, approved, and conducted under the auspices of
    an Institutional Review Board, or IRB, and each trial, with
    limited exceptions, must include the patients informed
    consent. Typically, clinical evaluation involves the following
    time-consuming and costly three-phase sequential process:  Phase I.
  Phase II.
  Phase III.
      New
    Drug Application
     12




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Post
    Approval Phase
        Hatch-Waxman
    Act
   13




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Pediatric
    Exclusivity
    Orphan
    Drug Designation and Exclusivity
      Foreign
    Regulation
      Other
    Regulations
   14




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and/or
    Employees
    Organization;
    Principal Executive Offices
  (301) 556-9900.
  Available
    Information
  Form 10-K, Form 10-Q Form 8-K,
  ITEM 1A.
    RISK
    FACTORS  Risks
    Related to Our Business
  Because
    we have a limited operating history, there is a limited amount
    of information about us upon which you can evaluate our business
    and prospects.
    
    advance AVN944 through the development process;
    demonstrate the advantages and reliability of our proprietary
    drug discovery and development technology,
    AvalonRx®;
    build and maintain a strong intellectual property portfolio; 15




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
    develop and maintain successful strategic relationships; and
    manage costs associated with our research and product
    development plans, conducting clinical trials, obtaining
    regulatory approvals and delivering pharmaceutical products to
    the market.    We
    will need substantial additional funding, which may not be
    available to us on acceptable terms, or at all.
    
    fund clinical trials and seek regulatory approvals;
    pursue the development of additional product candidates;
    maintain and expand our research and development activities;
    access manufacturing and commercialization capabilities;
    implement additional internal systems and infrastructure;
    maintain, defend and expand the scope of our intellectual
    property portfolio; and
    hire additional personnel.    
    the size and complexity of research and development programs;
    our ability to attract and retain partners;
    the scope and results of preclinical testing and clinical trials;
    continued scientific progress in our research and development
    programs;
    the time and expense involved in seeking regulatory approvals;
    competing technological and market developments;
    acquisition, licensing and protection of intellectual property
    rights; and
    the cost of establishing manufacturing capabilities and
    conducting commercialization activities.    We
    have a history of losses, we expect to continue to incur losses
    for the foreseeable future, and we may never achieve or sustain
    profitability.
   16




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We
    have no products approved for commercial sale and do not expect
    to have any products approved for commercial sale for the next
    several years; our lead drug candidate, AVN944, is at an early
    stage of development, and we may not successfully develop it or
    any other future drug candidate into a commercial
    product.
    The
    drug discovery methods we employ through
    AvalonRx®
    are new and unproven and may not lead to the development of
    commercially viable drugs.
  ®
  We may
    be unable to accelerate the drug discovery
    process.
  ® ® in vivo ® ® ®
  Preclinical
    and clinical testing are time consuming, expensive, and
    uncertain processes.
   17




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
    a limited number of, and competition for, suitable patients with
    particular types of cancer for enrollment in clinical trials;
    delays or failures in obtaining regulatory clearance to commence
    a clinical trial;
    delays or failures in obtaining sufficient clinical materials;
    delays or failures in reaching agreement on acceptable clinical
    trial agreement terms or clinical trial protocols with
    prospective sites; and
    delays or failures in obtaining Institutional Review Board, or
    IRB, approval to conduct a clinical trial at a prospective site.    
    slower than expected rates of patient recruitment and enrollment;
    failure of patients to complete the clinical trial;
    unforeseen safety issues;
    lack of efficacy during clinical trials;
    inability or unwillingness of patients or medical investigators
    to follow our clinical trial protocols;
    inability to monitor patients adequately during or after
    treatment; and
    regulatory action by the FDA for failure to comply with
    regulatory requirements.      
    failing to demonstrate clinical effectiveness or having
    significantly lower efficacy than existing therapies;
    producing harmful side effects;
    denial of regulatory approvals by the FDA or other regulators;
    failing to acquire, on reasonable terms, intellectual property
    rights necessary for commercialization; and
    loss of market to competing drugs which are more effective or
    economical. 18




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If we
    fail to enter into new strategic collaborations, or if existing
    collaborations are terminated, we will not grow our revenue and
    our ability to exploit
    AvalonRx®
    to discover drugs for diseases other than cancer will be
    limited.
    We
    intend to rely on third parties to conduct clinical trials for
    our drug candidates and those third parties may not perform
    satisfactorily.
    We do
    not have any manufacturing capabilities for any of our drug
    candidates.
  start-up
 19




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We
    have no sales, marketing or distribution
    experience.
    
    we may not be able to attract and build a significant marketing
    or sales force;
    the cost of establishing, training, and providing regulatory
    oversight for a marketing or sales force may not be justifiable
    in light of the revenues generated by any particular product;
    our direct sales and marketing efforts may not be successful; and
    there are significant legal and regulatory risks in drug
    marketing and sales that we have never faced, and any failure to
    comply with all legal and regulatory requirements for sales,
    marketing, and distribution could result in enforcement action
    by the FDA or other authorities that could jeopardize our
    ability to market the product or could subject us to substantial
    liability.    Our
    chemical library may be insufficient to meet our
    needs.
  ®
  We
    face intense competition in the development and
    commercialization of our drug candidates.
       20




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
    attract qualified personnel;
    attract parties for acquisitions, joint ventures or other
    collaborations; and
    license technology that is competitive with our technology.  We may
    not be able to recruit and retain the experienced scientists and
    managers we need to compete in the drug research and development
    industry.
      We may
    face liability claims related to the use or misuse of our drug
    candidates in clinical trials. If our insurance coverage is not
    sufficient, a product liability claim against us could adversely
    affect our business.
      If we
    are not able to successfully manage our growth, our business
    could be materially harmed.
   21




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Our
    operating results may vary significantly from period to period,
    which may result in a decrease in the price of our common
    stock.
    
    the introduction of new anticancer drugs by us or our
    competitors;
    costs and expenses associated with delays in or changes to
    preclinical testing and clinical trials;
    the timing of regulatory approvals;
    sales and marketing expenses; and
    the amount and timing of operating costs and capital
    expenditures relating to the expansion of our business
    operations and facilities.    Our
    agreements with the Maryland Industrial Development Financing
    Authority, or MIDFA, and Manufacturers and Traders Trust
    Company, or M&T Bank, for the financing of our corporate
    office and research facility contain restrictions on our
    operations that could inhibit our ability to grow our business
    and generate revenues, and any default under these agreements
    could materially harm our business.
    and/or
  
    declare dividends or make other distributions on existing stock
    or create new classes of stock;
    change the nature of our business;
    incur additional debt;
    incur mortgages and pledges upon property owned or acquired;
    sell our assets;
    engage in mergers or consolidations, or acquire ownership
    interests of, or all or substantially all of the assets of,
    another entity;
    make loans; and
    guarantee indebtedness of any person or entity.   22




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Risks
    Related to Our Intellectual Property
  If we
    are unable to obtain and enforce patent protection for our drug
    candidates, our business could be materially
    harmed.
        Third
    parties may challenge the validity of our potential patents or
    other intellectual property rights and could deprive us of
    valuable rights. If we infringe patents or other proprietary
    rights of third parties, we could incur substantial
    liability.
         23




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Our
    drug discovery technology is not patented, and the value of our
    technology and drug candidates could be adversely affected if we
    are unable to protect the confidentiality of our proprietary
    information, know-how and trade secrets.
  ® ®
      We
    license patent rights from a third party, Vertex Pharmaceuticals
    Incorporated. If Vertex does not properly maintain or enforce
    the patents underlying such licenses, our competitive position
    and business prospects will be harmed.
    Risks
    Related to Regulatory Matters
  Because
    we must obtain regulatory approval to market our drug candidates
    in the United States and foreign jurisdictions, we cannot
    predict whether or when we will be permitted to commercialize
    our drug candidates.
   24




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
    must be conducted in conformance with the FDAs good
    clinical practices and other applicable regulations;
    must meet requirements for IRB oversight;
    must meet requirements for informed consent;
    are subject to continuing FDA oversight;
    may require large numbers of test subjects; and
    may be suspended by us or the FDA at any time, particularly if
    it is believed that the subjects participating in these trials
    are being exposed to unacceptable health risks or if the FDA
    finds deficiencies in the IND or the conduct of these trials.      Even
    if our drug candidates obtain regulatory approval, we will be
    subject to ongoing government regulation.
     25




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We
    have only limited experience in regulatory affairs which may
    affect our ability or the time we require to obtain necessary
    regulatory approvals.
    Third
    parties engaged to produce our drug candidates for clinical use
    may fail to comply with regulatory requirements, which could
    delay clinical trials.
    Healthcare
    reform and cost control initiatives by third-party payors could
    reduce the prices that can be charged for drugs, which could
    limit the commercial success of our drug
    candidates.
     26




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We or
    our future collaborators may not obtain favorable reimbursement
    rates for our drug candidates.
    Our
    operations involve hazardous materials and medical waste and are
    subject to environmental, health and safety controls and
    regulations. Any claim relating to our improper handing, storage
    or disposal of biological and hazardous materials could be
    time-consuming and costly, and may exceed our
    resources.
    Our
    business involves animal testing and changes in laws,
    regulations or accepted clinical procedures or social pressures
    could restrict our use of animals in testing and adversely
    affect our research and development efforts.
      Risks
    Related to Our Common Stock and Organizational
    Structure
  Our
    stock price is volatile.
   27




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Insiders
    have substantial control over us and could delay or prevent a
    change in corporate control.
    
    delaying, deferring or preventing a change in control of our
    Company;
    impeding a merger, consolidation, takeover or other business
    combination involving our Company; or
    discouraging a potential acquirer from making a tender offer or
    otherwise attempting to obtain control of our Company.  Provisions
    in our charter documents and under Delaware law could make an
    acquisition of us, which may be beneficial to our stockholders,
    more difficult and may prevent attempts by our stockholders to
    replace or remove our current management.
    
    the requirement that actions by our stockholders by written
    consent be unanimous;
    the ability of our board of directors to issue preferred stock
    without stockholder approval, which could be used to institute a
    poison pill that would work to dilute the stock
    ownership of a potential hostile acquirer, effectively
    preventing acquisitions that have not been approved by our board
    of directors; and
    advance notice requirements for nominations to our board of
    directors and for proposing matters that can be acted upon at
    stockholder meetings.    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS   28




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ITEM 2.
    PROPERTIES    ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITIES HOLDERS   PART II  ITEM 5.
    MARKET
    FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
    MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    Information
      High


Low2006:First Quarter(January 1 
    March 31)

$
5.99


$
3.80Second Quarter(April 1 
    June 30)

$
5.45


$
3.30Third Quarter(July 1 
    September 30)

$
3.98


$
2.20Fourth Quarter(October 1 
    December 31)

$
4.35


$
2.47   High


Low2005:Third Quarter(September
    29  September 30))

$
10.75


$
8.26Fourth Quarter(October 1 
    December 31)

$
9.25


$
4.26     Stockholders
    Dividends
   29




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Securities
    Authorized for Issuance under Equity Compensation
    Plans
  Form 10-K.
  Unregistered
    Sales of Securities
    Use of
    Proceeds
  Form S-1 (333-124565) Form S-1
  Issuer
    Purchases of Equity Securities
   30




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Performance
    Graph
    COMPARISON
    OF CUMULATIVE TOTAL RETURNS
  
  Cumulative Total Returns9/29/05

12/30/05

12/29/06Avalon Pharmaceuticals,
    Inc.

$
100.00


$
47.42


$
41.10Nasdaq Stock Market
    (U.S.)


100.00



138.56



121.27Nasdaq Pharmaceutical
    Index


100.00



102.36



100.19  31




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ITEM 6.
    SELECTED
    FINANCIAL DATA  Form 10-K.
  December 31,2006


2005


2004


2003


2002(In thousands, except per share data)SUMMARY STATEMENTS OF
    OPERATIONS:Revenue

$
2,724


$
1,544


$
1,900


$
100


$
Operating expenses:Research and development


13,269



15,789



10,680



12,510



12,832General and administrative


7,661



5,066



4,325



4,567



4,434Total operating expenses


20,930



20,855



15,005



17,077



17,266Loss from operations


(18,206
)


(19,311
)


(13,105
)


(16,977
)


(17,266
)Other income (expense):Interest income


1,288



503



327



678



1,157Interest expense


(808
)


(1,147
)


(890
)


(701
)


(52
)Other


624



663



8



(75
)


(5
)Other income (expense), net


1,104



19



(555
)


(98
)


1,110Net loss

$
(17,102
)

$
(19,292
)

$
(13,660
)

$
(17,075
)

$
(16,156
)Dividends on and accretion of
    convertible preferred stock






(1,111
)


(1,449
)


(1,449
)


(1,401
)Net loss attributed to common
    shareholders


(17,102
)


(20,403
)


(15,109
)


(18,524
)


(17,557
)Net loss per share 
    basic and diluted

$
(1.74
)

$
(9.58
)

$
(117.65
)

$
(146.29
)

$
(139.61
)Weighted average number of shares
    of Common Stock outstanding


9,841,235



2,129,388



128,417



126,630



125,757   As of December 31,2006


2005


2004


2003


2002(In thousands)SUMMARY BALANCE SHEET
    DATA:Cash, cash equivalents and
    marketable securities(1)

$
20,430


$
27,748


$
14,309


$
27,720


$
39,692Working capital


9,081



17,070



5,545



15,300



34,969Total assets


31,391



41,282



29,292



46,055



53,112Total debt


8,725



10,944



13,631



16,234



4,097Accumulated deficit


(102,704
)


(85,602
)


(65,949
)


(51,454
)


(33,553
)Total stockholders equity


17,874



25,883



(65,971
)


(51,435
)


(33,388
)     (1)
    
    Includes restricted cash of $5.5 million, $6.3 million
    and $6.1 million at December 31, 2006, 2005 and 004,
    respectively. 32




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ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Overview
  ®
  ®
    Financial
    Operations Overview
  Revenue
    Collaboration Revenue.
  Research
    and Development Expense
     33




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®
    General
    and Administrative
    Quarterly
    Results May Fluctuate
    
    the timing and extent of our development activities and clinical
    trials for AVN944 and any other biopharmaceutical drug
    candidates that we may develop in the future;
    the timing and outcome of our applications for regulatory
    approval for our drug candidates;
    the timing and extent of our adding new employees and
    infrastructure; and
    the timing of any milestone payments, license fees, or royalty
    payments that we may be required to make.  Critical
    Accounting Policies and Significant Judgments and
    Estimates
    Form 10-K.
  Revenue
    Recognition
   34




---



##### Table of Contents



Accrued
    Expenses
    Stock-Based
    Compensation
  Share-Based Payment Accounting for
    Stock Issued to Employees
         35




---



##### Table of Contents



Results
    of Operations
  Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Revenue.
  Research and Development.
    General and Administrative.
  Interest Income.
  Interest Expense.
  Other Income.
  Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Revenue.
  Research and Development.
 36




---



##### Table of Contents



General and Administrative.
    Interest Income.
  Interest Expense.
  Liquidity
    and Capital Resources
  Overview
    
    fund our research, development and clinical programs;
    obtain regulatory approvals;
    prosecute, defend and enforce any patent claims and other
    intellectual property rights;
    fund general corporate overhead; and
    support our debt service requirements and contractual
    obligations.          Sources
    and Uses of Cash
  Operating Activities.
 37




---



##### Table of Contents



Investing Activities.
  Financing Activities.
  Credit
    Arrangements
      to 48-month
  Operating
    Capital and Capital Expenditure Requirements
    
    the size and complexity of our research and development programs;
    the scope and results of our preclinical testing and clinical
    trials; 38




---



##### Table of Contents




    continued scientific progress in our research and development
    programs;
    the time and expense involved in seeking regulatory approvals;
    competing technological and market developments;
    acquisition, licensing and protection of intellectual property
    rights; and
    the cost of establishing manufacturing capabilities and
    conducting commercialization activities.    Contractual
    Obligations
    Payment Due by PeriodLess Than


1-3


4-5


More ThanContractual Obligations

Total


1 Year


Years


Years


5 YearsLong-term debt(1)

$
11,014


$
2,156


$
4,866


$
2,758


$
1,233Operating lease obligations(2)


4,716



718



2,287



1,641



70Cooperative research and
    development agreements(3)


27



28











Total(4)

$
15,757


$
2,902


$
7,153


$
4,399


$
1,303     (1)
    
    Includes principal, interest and letter of credit fee payments
    on our development bond financing and principal and interest
    payments on our equipment financing. Our development bond
    financing carries a variable interest rate. Amounts presented in
    the table assume a fixed rate of 5.45% that was in effect on
    December 31, 2006. The table does not include potential
    discounts for debt prepayment.(2)
    
    Our operating lease obligations relate to the lease for our
    headquarters in Germantown, Maryland.(3)
    
    Cooperative research and development agreements include
    commitments into which we have entered as of December 31,
    2006 to engage third parties to perform various aspects of our
    research and development efforts subsequent to that date.(4)
    
    The table above reflects only payment obligations that are fixed
    and determinable. Accordingly, the table does not include any
    milestone payments under agreements we have entered into in
    relation to our in-licensed technology, including our license
    with Vertex Pharmaceuticals Incorporated for the development and
    commercialization of AVN944, as the timing and likelihood of
    such payments are not known. We also have service agreements
    with clinical sites for the conduct of our
    U.S. Phase I clinical trial of AVN944 in cancer
    patients. We make payments to these sites based upon the actual
    number of patients enrolled and the period of
    follow-up in
    the trials. We do not have minimum payment obligations under
    these agreements and the amount to be paid to each center and
    the timing of those payments will vary based on the negotiated
    amount paid for each patient to be treated and for each patient
    screened who fails to or declines to participate in the clinical
    trial. Due to the variability associated with these agreements
    and the timing of patient enrollment, we are unable to estimate
    with certainty the future patient enrollment costs we will incur. 39




---



##### Table of Contents



Recent
    Accounting Pronouncements
  Share-Based Payment Accounting for Stock-Based
    Compensation. Accounting for Stock Issued to Employees Statement of Cash
    Flows. Form 10-K
  Off-Balance
    Sheet Arrangements
    Subsequent
    Events
   ITEM 7A.  QUANTITATIVE
    AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK        Cash and cash equivalents

$
3.1 millionShort-term investments

$
10.0 millionLong-term investments

$
1.8 millionRestricted cash

$
5.5 million   available-for-sale
   40




---



##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             Ernst &
    Young LLP
    41




---



##### Table of Contents



Avalon
    Pharmaceuticals, Inc.
  Balance
    Sheets
  December 31,2006


2005(In thousands, exceptshare and per share data)ASSETSCurrent assets:Cash and cash equivalents

$
3,099


$
9,732Short-term marketable securities


9,980



10,922Accounts receivable


724



794Interest receivable


175



201Prepaid expenses


642



833Deposits


102



102Total current assets


14,722



22,584Restricted cash and marketable
    securities


5,520



6,313Property and equipment, net


8,923



10,997Long-term marketable securities


1,831



781Deposits


105



205Deferred financing costs


290



401Total assets

$
31,391


$
41,282LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,857


$
1,098Accrued expenses and other current
    liabilities


1,232



913Deferred revenue


1,034



1,273Current portion on long-term debt


1,518



2,230Total current liabilities


5,641



5,514Deferred rent


469



468Long-term deferred revenue, net of
    current portion


200



650Long-term debt, net of current
    portion


7,207



8,714Other long-term liabilities






53Stockholders equity:Common stock, $0.01 par
    value; 60,000,000 shares authorized; 10,137,340 and
    8,407,376 shares issued and outstanding at
    December 31, 2006 and 2005, respectively


101



84Additional capital


120,477



111,677Deferred stock compensation






(250
)Other comprehensive loss






(26
)Accumulated deficit


(102,704
)


(85,602
)Total stockholders equity


17,874



25,883Total liabilities and
    stockholders equity

$
31,391


$
41,282    42




---



##### Table of Contents



Avalon
    Pharmaceuticals, Inc.
  Statements
    of Operations
  Year Ended December 31,2006


2005


2004(In thousands, except per share data)Revenues

$
2,724


$
1,544


$
1,900Costs and expenses:Research and development


13,269



15,789



10,680General and administrative


7,661



5,066



4,325Total costs and expenses


20,930



20,855



15,004Loss from operations


(18,206
)


(19,311
)


(13,104
)Other income (expense):Interest income


1,288



503



327Interest expense


(808
)


(1,147
)


(890
)Other


624



663



8Total other income (expense):


1,104



19



(554
)Net Loss

$
(17,102
)

$
(19,292
)

$
(13,659
)Accretion of redeemable
    convertible preferred stock






(1,111
)


(1,449
)Net loss attributed to Common
    Stockholders

$
(17,102
)

$
(20,403
)

$
(15,108
)Net loss attributed to Common
    Stockholders per common share  basic and diluted

$
(1.74
)

$
(9.58
)

$
(117.65
)Weighted average number of common
    shares  basic and diluted


9,841,235



2,129,388



128,417    43




---



##### Table of Contents



Avalon
    Pharmaceuticals, Inc.
  Statements
    of Redeemable Convertible Preferred Stock and Stockholders
    Equity (Deficit)
 (In thousands, except share amounts)
  Redeemable Convertible Preferred Stock











Additional


Deferred


Other





TotalSeries A


Series B


Bridge


Common Stock


Paid-In


Stock


Comprehensive


Accumulated


StockholdersShares


Amount


Shares


Amount


Financing


Shares


Amount


Capital


Compensation


Income


Deficit


Equity (Deficit)Balance at December 31,
    2003


5,577,500


$
111,555



20,126,997


$
66,894







127,184


$
1


$
9


$



$
9


$
(51,454
)

$
(51,435
)Issuance of common stock to
    employee upon exercise of stock options






















1,506



0



3















3Deferred stock compensation






























3















3Amortization of Series B
    offering costs














874















(38
)










(836
)


(874
)Amortization of Series B
    purchase stock warrant














575















32















32Net loss










































(13,659
)


(13,659
)Net unrealized gain on available
    for sale securities






































(41
)






(41
)Net comprehensive loss














































(13,700
)Balance at December 31,
    2004


5,577,500



11,155



20,126,997



68,343







128,690



1



9







(32
)


(65,949
)


(65,971
)Issuance of common stock to
    employee upon exercise of stock options






















3,521



0



9















9Deferred stock compensation






























379



(379
)










Amortization of deferred stock
    compensation


































129











129Proceeds from Convertible bridge
    financing and related accrued interest of $267,140


















5,294



























5,294Amortization of Series B
    offering costs














656















(295
)










(361
)


(656
)Amortization of Series B
    purchase stock warrant














456































456Conversion of Series B stock
    warrants to common stock warrants






























656















656Conversion of preferred stock to
    common upon close of credit facility


(1,000,000
)


(2,000
)


(1,190,611
)


(4,109
)






273,826



3



6,106















6,109Conversion of preferred stock,
    convertible notes and related accrued interest upon IPO


(4,577,500
)


(9,155
)


(18,936,386
)


(65,346
)


(5,294
)


5,251,339



53



79,742















74,501Issuance of common stock upon IPO,
    net of offering costs






















2,750,000



28



25,072















25,100Net loss










































(19,292
)


(19,292
)Net unrealized gain on available
    for sale securities






































6







6Net comprehensive loss














































(19,286
)Balance at December 31,
    2005





$







$
0


$
0



8,407,376


$
84


$
111,677


$
(250
)

$
(26
)

$
(85,602
)

$
25,883Issuance of common stock to
    employee upon exercise of stock options






















35,152



0



93















93Issuance of common stock to board
    of directors as compensation






















28,146



0



103















103Issuance of common stock, net of
    offering costs






















1,666,666



17



7,180















7,197Expense fair value of options per
    FAS 123R






























1,674















1,674Deferred stock compensation






























(250
)


250











Net loss










































(17,102
)


(17,102
)Net unrealized gain on available
    for sale securities






































26







26Net comprehensive loss














































(17,076
)Balance at December 31,
    2006





$







$
0


$
0



10,137,340


$
101


$
120,477


$
0


$
(0
)

$
(102,704
)

$
17,874     44




---



##### Table of Contents



Avalon
    Pharmaceuticals, Inc.
  Statements
    of Cash Flows
  Year Ended December 31,2006


2005


2004(In thousands)Operating activities Net loss

$
(17,102
)

$
(19,292
)

$
(13,659
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation


2,425



2,644



2,768Non cash interest expense


282



623



385Warrant amortization










32Compensation expense related to
    stock and stock options


1,778



129



3Loss on disposal of assets










5Amortization of premium on
    investments


(37
)


148



527Changes in operating assets and
    liabilities:Accounts receivable


196



(475
)


266Prepaid expenses


190



(580
)


91Other assets










213Accounts payable


758



719



63Accrued liabilities


266



766



(69
)Deferred revenue


(689
)


1,923



(500
)Deferred rent


1



22



41Net cash used in operating
    activities


(11,932
)


(13,373
)


(9,832
)Investing activities Purchases of
    marketable securities


(19,974
)


(24,771
)


(19,972
)Proceeds from sale of marketable
    securities


20,723



18,671



30,002Purchases of property and equipment


(351
)


(243
)


(110
)Net cash provided by (used in)
    investing activities


398



(6,343
)


9,920Financing activities Principal
    payments on debt, line of credit


(1,018
)


(1,487
)


(1,428
)Proceeds from issuance of common
    stock, net


7,290



25,109



3Principal payments on bond payable


(1,200
)


(1,200
)


(1,200
)Deferred financing costs


(171
)


(251
)


(259
)Proceeds from issuance convertible
    notes






5,026



Net cash provided by (used in)
    financing activities


4,901



27,197



(2,884
)Net increase (decrease) in cash
    and cash equivalents


(6,633
)


7,481



(2,796
)Cash and cash equivalents at
    beginning of year


9,732



2,251



5,047Cash and cash equivalents at end
    of year

$
3,099


$
9,732


$
2,251Supplemental information Cash paid
    for interest

$
515


$
1,147


$
473    45




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS
 December 31, 2006
  1.  Organization
  ®
    2.
    Summary
    of Significant Accounting Policies  Use of
    Estimates
    Cash
    and Cash Equivalents
    Marketable
    Securities
  available-for-sale. other-than-temporary available-for-sale other-than-temporary
  Property
    and Equipment
   46




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    December 31,2006


2005Scientific equipment

$
6,730


$
6,503Computer equipment


1,338



1,234Leasehold improvements


12,093



12,093Furniture and fixtures


463



44320,624



20,273Less accumulated depreciation


11,701



9,276Property and equipment, net

$
8,923


$
10,997     Deferred
    Financing Costs
    Revenue
    Recognition
    Research
    and Development Costs
    Income
    Taxes
   47




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Restricted
    Cash and Investments
    Stock-Based
    Compensation
        Year Ended December 31,2006


2005


2004(In thousands)Actual net loss attributable to
    common stockholders:As reported

$
(17,102
)

$
(20,403
)

$
(15,108
)Add: Stock compensation included
    in reported net loss attributable to common stockholders






129



3Deduct: Total stock-based employee
    compensation expense determined under fair value-based method
    for all awards






(681
)


(126
)Pro forma net loss attributable to
    common stockholders


(17,102
)


(20,955
)


(15,231
)Net loss attributable to common
    stockholders per common share:Basic and diluted  as
    reported

$
(1.74
)

$
(9.58
)

$
(117.65
)Basic and diluted  pro
    forma

$
(1.74
)

$
(9.84
)

$
(118.61
)Weighted average number of common
    shares  basic and diluted


9,841,235



2,129,388



128,417  48




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Accounting
    for Stock-Based Compensation
  Basic
    and Diluted Net Loss Attributable to Common Stockholders Per
    Common Share
    Comprehensive
    Loss
  Reporting Comprehensive Income available-for-sale
  Fair
    Value of Financial Instruments and Concentration of Credit
    Risk
    Segment
    Information
  Disclosure about Segments of an
    Enterprise and Related Information.
 49




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   3.
    Marketable
    Investments    2006


2005Amortized


Gains





Amortized


GainsAvailable for Sale

Cost


(Losses)


Fair Value


Cost


(Losses)


Fair ValueInvestmentsU.S. Treasury and agencies

$



$



$



$
782


$
(1
)

$
781Corporate debt securities


11,811







11,811



10,949



(27
)


10,92211,811







11,811



11,731



(28
)


11,703Restricted
    investmentsCash and cash equivalents


3,099







3,099



6,313







6,313U.S. Treasury and agencies


657



(1
)


656



0







0Corporate debt securities


1,765







1,765











5,521



(1
)


5,520



6,313







6,313$
17,332


$
(1
)

$
17,331


$
18,044


$
(28
)

$
18,016     2006


2005Maturity

Amortized Cost


Fair Value


Amortized Cost


Fair ValueLess than one year

$
15,499


$
15,499


$
17,262


$
17,235Due in one to two years


1,832



1,831



782



781Total

$
17,331


$
17,330


$
18,044


$
18,016   4.
    Debt    December 31,2006


2005Maryland Industrial Development
    Financing Authority Taxable Variable Rate Demand Revenue Bond

$
8,400


$
9,600Equipment financing


329



1,3598,729



10,959Less current portion


(1,518
)


(2,230
)Less discount related to warrants


(4
)


(15
)Long-term debt

$
7,207


$
8,714   Maryland
    Industrial Development Financing Authority (MIDFA) Taxable
    Variable Rate Demand Revenue Bond
   50




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Equipment
    Financing
  36-month
         51




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     2007

$
1,5292008


1,2002009


1,2002010


1,2002011


1,200Thereafter


2,400$
8,729   5.
    Redeemable
    Convertible Preferred Stock  Series A
    Redeemable Convertible Preferred Stock
        Series B
    Redeemable Convertible Preferred Stock
         52




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   6.
    Stockholders
    Equity (Deficit)  Reverse
    Stock Split
  1-for-5 1-for-1.6
  Common
    Stock
          Stock
    Options
   53




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
          ®
    Weighted-Weighted-


AverageAverage


Remaining


AggregateExercise


Contractual


IntrinsicShares


Price


Term


Value(in thousands)Balance at December 31, 2003


535,022



2.85Granted


46,985



3.20Exercised


(1,508
)


1.73Cancelled or expired


(24,705
)


3.08Balance at December 31, 2004


555,794



2.87Granted


746,440



5.86Exercised


(3,520
)


2.49Cancelled or expired


(24,876
)


3.06Balance at December 31, 2005


1,273,838



4.62Granted


874,433



3.39Exercised


(35,152
)


2.64Cancelled or expired


(123,645
)


4.62Balance at December 31, 2006


1,989,474



4.11Outstanding at December 31,
    2006


1,989,474


$
4.11



8.4210


$
922Vested and expected to vest at
    December 31, 2006


1,925,015


$
4.11



8.4210


$
922Exercisable at December 31,
    2006


931,548


$
4.39



7.0553


$
489Exercisable at December 31,
    2005


472,779


$
2.94Exercisable at December 31,
    2004


388,477


$
2.76  54




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    2006


2005


2004Option pricing model


Black-Scholes



Black-Scholes



Black-ScholesExpected stock price volatility


69.26
%


66.2
%


56.1
%Expected dividend yield


0
%


0
%


0
%Risk-free interest rate


4.60
%


4.00
%


3.41
%Expected life of option (years)


6.0



4.7



5.0   Expected Stock Price Volatility
  Dividend Yield
  Risk-Free Interest Rate 
  Expected Life of the Option Term
      Outstanding as of 12/31/06Weighted-


Exercisable as of 12/31/06Average





Weighted-Weighted-


Remaining





AverageAverage


Contractual





ExerciseExercise Prices

Vested


Unvested


Exercise Price


Term


Shares


Price$1.28 - $1.92


97,757



500


$
1.60



3.5208



97,757


$
1.60$1.92 - $2.56


690



8,279


$
2.35



9.5907



690


$
2.35$2.56 - $3.20


364,714



331,695


$
3.00



7.6285



364,714


$
3.18$3.20 - $3.84






461,900


$
3.78



9.9388







$3.84 - $4.48


4,788



13,376


$
3.89



9.5562



4,788


$
3.86$4.48 - $5.12


6,256



14,494


$
4.78



9.2187



6,256


$
4.81$5.12 - $5.76


60,213



180,644


$
5.50



8.9172



60,213


$
5.50$5.76 - $6.40


397,130



47,038


$
6.03



8.7926



397,130


$
6.02931,548



1,057,926


$
4.11



8.4210



931,548


$
4.39  55




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      Stock
    Warrants
    7.
    Income
    Taxes    December 31,2006


2005(in thousands)Deferred tax assets:Net operating loss carryforwards

$
27,051


$
19,492Capitalized research and
    development expenses


7,135



8,596Start-up
    costs


2,146



3,218Deferred revenue


399



Deferred rent expense


181



181Accrued payroll


119



60Depreciation


738



276R&D Credit


1,616



Stock Options


389



Other


31



75Deferred tax liabilities:Depreciation






Valuation allowance


(39,805
)


(31,898
)Net deferred tax assets

$



$
    56




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        2006


2005


2004Federal tax at statutory rates

$
(5,815
)

$
(6,559
)

$
(4,644
)State taxes, net of federal benefit


(758
)


(876
)


(630
)Change in valuation allowance


6,339



7,322



5,267Permanent differences


234



113



7Provision for income taxes

$



$



$
   8.
    Related
    Party Transactions    9.
    Commitments
    and Contingencies  10-year
    Operating


Sublease Income2007

$
718


$
282008


740



2009


762



2010


785



2011


808



Thereafter


903



Total

$
4,716


$
28  57




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  10.
    Collaborations
    and Licenses      ®
        ®
 58




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      ®
  ® tm
    11.
    Employee
    Benefit Plan   59




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##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   12.  Quarterly
    Financial Information (Unaudited)
  Quarter EndedMarch 31


June 30


September 30


December 31(in thousands, except per share data)2006 Summary statement of
    operations:Total revenues

$
539


$
417


$
1,115


$
653Loss from operations


(4,863
)


(4,716
)


(3,992
)


(4,635
)Net loss attributable to Common
    Stockholders


(4,558
)


(4,429
)


(3,723
)


(4,391
)Net loss attributable to CommonStockholders per common
    share  basic and diluted


(0.51
)


(0.44
)


(0.37
)


(0.43
)2005 Summary statement of
    operations:Total revenues

$



$



$
748


$
796Loss from operations


(8,702
)


(3,979
)


(3,642
)


(2,970
)Net loss attributable to Common
    Stockholders


(9,072
)


(4,349
)


(4,013
)


(2,970
)Net loss attributable to CommonStockholders per common
    share  basic and diluted


(70,49
)


(33.56
)


(29.50
)


(0.37
)   13.
    Subsequent
    Event  ®
    ®
   60




---



##### Table of Contents



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   61




---



##### Table of Contents



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Disclosure
    Controls and Procedures
  Rule 13(a)-15(e) Form 10-K.
  Changes
    in Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
  ITEM 9B.
    OTHER
    INFORMATION   PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      http://www.avalonrx.com Form 8-K
     62




---



##### Table of Contents



ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS      ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES           63




---



##### Table of Contents



SIGNATURES
    AVALON PHARMACEUTICALS, INC.
  By:
    /s/  Kenneth
    C. Carter, Ph.D.       POWER OF
    ATTORNEY
  attorneys-in-fact attorneys-in-fact attorneys-in-fact
    Signature

Title

Date/s/  Kenneth
    C.
    Carter, Ph.D.Kenneth
    C. Carter, Ph.D.

President, Chief Executive
    Officer and Director(Principal Executive Officer)

March 30, 2007/s/  Gary
    LessingGary
    Lessing

Executive Vice President and
    Chief Financial Officer(Principal Financial Officer)

March 30, 2007/s/  Glen
    A. FarmerGlen
    A. Farmer

Controller 
    (Principal Accounting Officer)

March 30, 2007/s/  David
    S.
    Kabakoff, Ph.D.David
    S. Kabakoff, Ph.D.

Director

March 30, 2007/s/  Michael
    R.
    Kurman, M.D.Michael
    R. Kurman, M.D.

Director

March 30, 2007/s/  Bradley
    G. LorimierBradley
    G. Lorimier

Director

March 30, 2007/s/  Ivor
    Royston, M.D.Ivor
    Royston, M.D.

Director

March 30, 2007 64




---



##### Table of Contents



Signature

Title

Date/s/  William
    A.
    Scott, Ph.D.William
    A. Scott, Ph.D.

Director

March 30, 2007/s/  Patrick
    Van BenedenPatrick
    Van Beneden

Director

March 30, 2007/s/  Alan
    G. Walton, Ph.D.,
    D.Sc.Alan
    G. Walton, Ph.D., D.Sc.

Chairman of the Board of Directors

March 30, 2007/s/  William
    H. WasheckaWilliam
    H. Washecka

Director

March 30, 2007/s/  Raymond
    J. Whitaker,
    MBA, Ph.D.Raymond
    J. Whitaker, MBA, Ph.D.

Director

March 30, 2007




---



##### Table of Contents



INDEX TO
    EXHIBITS
  ExhibitNumber

Exhibit Title3
.1(1)

Amended and Restated Certificate
    of Incorporation of Avalon Pharmaceuticals, Inc., as amended3
.2(1)

Amended and Restated Bylaws4
.1(1)

Specimen Common Stock Certificate10
.1*(1)

License Development and
    Commercialization Agreement, dated February  14, 2005,
    between Avalon Pharmaceuticals, Inc. and Vertex Pharmaceuticals
    Incorporated10
.2*(1)

Collaboration Agreement, effective
    as of October 15, 2003, between Avalon Pharmaceuticals,
    Inc. and Medarex, Inc. on behalf of itself and its wholly-owned
    subsidiary, GenPharm International, Inc.10
.3*(1)

Collaboration and License
    Agreement, dated June 17, 2005, between Avalon
    Pharmaceuticals, Inc. and MedImmune, Inc.10
.4*(1)

Pilot Study Agreement, dated
    September 9, 2005, between Avalon Pharmaceuticals, Inc. and
    Novartis Institutes for Biomedical Research, Inc.10
.5A*(8)

Collaboration Agreement between
    Avalon Pharmaceuticals, Inc. and ChemDiv, Inc., dated
    July 25, 200610
.5B*(8)

First Amendment, dated
    September 21, 2006, to Collaboration Agreement between
    Avalon Pharmaceuticals, Inc. and ChemDiv, Inc.10
.6A(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Kenneth C. Carter, Ph.D.10
.6B

Amendment No. 1, dated
    December 26, 2006, to Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Kenneth C. Carter, Ph.D. (filed
    herewith)10
.7A(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Thomas G. David10
.7B

Amendment No. 1, dated
    December 26, 2006, to Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Thomas G. David (filed herewith)10
.8A(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Gary Lessing10
.8B

Amendment No. 1, dated
    December 26, 2006, to Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Gary Lessing (filed herewith)10
.9A(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and David Bol, Ph.D.10
.9B

Amendment No. 1, dated
    December 26, 2006, Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and David Bol, Ph.D (filed herewith)10
.10(A)(6)

Offer letter between Avalon
    Pharmaceuticals, Inc. and J. Michael Hamilton, dated
    April 20, 2006.10
.10(B)

Amendment No. 1, dated
    December 26, 2006, to Employment Agreement between Avalon
    Pharmaceuticals, Inc. and J. Michael Hamilton, dated
    April  20, 2006 (filed herewith)10
.11(A)(7)

Offer letter between Avalon
    Pharmaceuticals, Inc. and David D. Muth, dated
    September 12, 2006.10
.11(B) 

Amendment No. 1, dated
    December 26, 2006, to Employment Agreement between Avalon
    Pharmaceuticals, Inc. and David D. Muth, dated
    September  12, 2006 (filed herewith)10
.12A(1)

Consulting Agreement, dated
    February 1, 2000, by and between Avalon Pharmaceuticals,
    Inc. and Bradley G. Lorimier10
.12B(1)

Addendum to Consulting Agreement10
.12C(1)

Second Addendum to Consulting
    Agreement, dated March 30, 200310
.12D(1)

Third Addendum to Consulting
    Agreement, dated October 25, 200410
.13(1)

Consulting Agreement, dated
    August 4, 2004, by and between Avalon Pharmaceuticals, Inc.
    and Michael R. Kurman10
.14(1)

Avalon Pharmaceuticals, Inc.
    Amended and Restated 1999 Stock Plan, as of October 15,
    2001, as amended10
.15(1)

Avalon Pharmaceuticals, Inc.
    Amended and Restated 1999 Stock Plan  Form of
    Non-qualified Stock Option Agreement  $.20 per
    share




---



##### Table of Contents



ExhibitNumber

Exhibit Title10
.16(1)

Avalon Pharmaceuticals, Inc.
    Amended and Restated 1999 Stock Plan  Form of
    Non-qualified Stock Option Agreement  $.40 per
    share10
.17(1)

Avalon Pharmaceuticals, Inc.
    Amended and Restated 1999 Stock Plan  Form of
    Incentive Stock Option Agreement  $.20 per share10
.18(1)

Avalon Pharmaceuticals, Inc.
    Amended and Restated 1999 Stock Plan  Form of
    Incentive Stock Option Agreement  $.40 per share10
.19A(1)

Avalon Pharmaceuticals, Inc.
    Amended and Restated 1999 Stock Plan  First Amendment
    to Form of Incentive Stock Option Agreement10
.19B(1)

Avalon Pharmaceuticals, Inc.
    Amended and Restated 1999 Stock Plan  Second
    Amendment to Form of Incentive Stock Option Agreement10
.20(5)

Avalon Pharmaceuticals, Inc. 2005
    Omnibus Long-Term Incentive Plan, as amended10
.21(2)

Avalon Pharmaceuticals, Inc. 2005
    Omnibus Long-Term Incentive Plan  Form of Incentive
    Stock Option Agreement10
.22(2)

Avalon Pharmaceuticals, Inc. 2005
    Omnibus Long-Term Incentive Plan  Form of
    Nonqualified Stock Option Agreement10
.23

Stock Option Agreement Amendment,
    dated December 26, 2006, between Avalon Pharmaceuticals,
    Inc. and Gary Lessing (filed herewith)10
.24(3)

Stock Election Policy for
    Non-Employee Director Fees10
.25(1)

Form of Avalon Pharmaceuticals,
    Inc. Director and Officer Indemnification Agreement10
.26*(4)

Purchase Agreement, dated
    February 27, 200610
.27(4)

Registration Rights Agreement,
    dated February 27, 200610
.28(1)

Registration Rights Agreement,
    dated October 26, 2001, by and between Avalon
    Pharmaceuticals, Inc. and the Investors listed on
    Schedule I thereto10
.29(1)

Common Stock Warrant Agreement,
    dated August 11, 2000, by and between Avalon
    Pharmaceuticals, Inc. and Alexandria Real Estate Equities, L.P.10
.30(1)

Common Stock Warrant Agreement,
    dated March 23, 2001, by and between Avalon
    Pharmaceuticals, Inc. and Compugen, Ltd.10
.31(1)

Series B Convertible
    Preferred Stock Warrant, dated February 6, 2002, granted to
    Array Capital LLC10
.32A(1)

Series B Convertible
    Preferred Stock Warrant, dated May 14, 2001, granted to
    GATX Ventures, Inc.10
.32B(1)

Letter Amendment to Series B
    Convertible Preferred Stock Warrant, dated October 11,
    2001, by and between Avalon Pharmaceuticals, Inc. and GATX
    Ventures, Inc.10
.33(1)

Series B Convertible
    Preferred Stock Warrant Agreement, dated August  20,
    2002, by and between Avalon Pharmaceuticals, Inc. and General
    Electric Capital Corporation10
.34(1)

Series B Convertible
    Preferred Stock Warrant Agreement, dated December  23,
    2002, by and between Avalon Pharmaceuticals, Inc. and General
    Electric Capital Corporation10
.35(1)

Series B Convertible
    Preferred Stock Warrant Agreement, dated June 18, 2003, by
    and between Avalon Pharmaceuticals, Inc. and General Electric
    Capital Corporation10
.36(1)

Series B Convertible
    Preferred Stock Warrant Agreement, dated December  23,
    2003, by and between Avalon Pharmaceuticals, Inc. and General
    Electric Capital Corporation10
.37A(1)

Master Security Agreement, dated
    as of June 25, 2002, by and between General Electric
    Capital Corporation and Avalon Pharmaceuticals, Inc.10
.37B(1)

Amendment to Master Security
    Agreement dated as of June 25, 200210
.38(1)

Lease Agreement, dated
    July 15, 2002, by and between Westphalia Center II Limited
    Partnership and Avalon Pharmaceuticals, Inc.10
.39(1)

Trust Indenture, dated
    April 1, 2003, by and between the Maryland Industrial
    Development Financing Authority and Allfirst Trust Company
    National Association, as trustee (including form of Maryland
    Industrial Development Financing Authority Taxable Variable Rate
    Demand Revenue Bond (Avalon Pharmaceuticals, Inc. Facility)
    Series 2003)10
.40(1)

Loan Agreement, dated
    April 1, 2003, by and between Maryland Industrial
    Development Financing Authority and Avalon Pharmaceuticals, Inc.




---



##### Table of Contents



ExhibitNumber

Exhibit Title10
.41A(1)

Letter of Credit Agreement, dated
    April 1, 2003, by and between Avalon Pharmaceuticals, Inc.
    and Manufacturers and Traders Trust Company10
.41B(1)

Amendment to Irrevocable Letter of
    Credit, dated April 1, 200410
.41C(1)

Amended and Restored Modification
    and Consent Agreement by and between Manufactures and Traders
    Trust Company, Maryland Industrial Development Financing
    Authority and Avalon Pharmaceuticals, Inc., dated
    February 15, 200510
.41D(1)

Second Modification Agreement by
    and between Manufacturers and Traders Trust Company, Maryland
    Industrial Development Financing Authority and Avalon
    Pharmaceuticals, Inc., dated August 9, 200510
.42(1)

Security Agreement, dated
    April 1, 2003, by and between Avalon Pharmaceuticals, Inc.
    and Manufacturers and Traders Trust Company10
.43(1)

Collateral Pledge and Security
    Agreement and Control Agreement, dated April 1, 2003, by
    and between Avalon Pharmaceuticals, Inc. and Manufacturers,
    Traders Trust Company and Allfirst Trust Company National
    Association10
.44(1)

Insurance Agreement, dated
    April 1, 2003, by and between Maryland Industrial
    Development Financing Authority, Manufacturers and Traders Trust
    Company and Avalon Pharmaceuticals, Inc.10
.45(1)

Placement and Remarketing
    Agreement, dated April 1, 2003, by and between Maryland
    Industrial Development Financing Authority, Avalon
    Pharmaceuticals, Inc. and Manufacturers and Traders Trust Company10
.46(1)

Pledge and Security Agreement,
    dated April 1, 2003, by and between Avalon Pharmaceuticals,
    Inc. and Manufacturers and Traders Trust Company21
.1

List of Subsidiaries (filed
    herewith)23
.1

Consent of Ernst & Young
    LLP (filed herewith)31
.1

Certification of Chief Executive
    Officer pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 1934 as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 (filed
    herewith)31
.2

Certification of Chief Financial
    Officer pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 1934 as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 (filed
    herewith)32
.1

Certification of Chief Executive
    Officer and Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 (filed herewith)     *
    
    Confidential treatment has been granted for portions of this
    exhibit. These confidential portions have been omitted and were
    filed separately with the SEC.
    
    Denotes management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to our Registration Statement on
    Form S-1
    (File
    No. 333-124565).(2)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on November 1, 2005.(3)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on December 5, 2006.(4)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on March 3, 2006.(5)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on June  13, 2006.(6)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on August  2, 2006.(7)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on September 27, 2006.(8)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed on November 8, 2006.