##### 



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, 2005ORo

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(State or other
    jurisdiction of
    incorporation or organization)

52-2209310(I.R.S. Employer
    Identification No.)20358 Seneca Meadows
    Parkway,
    Germantown, Maryland(Address of principal
    executive offices)

20876(Zip
    Code)   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. o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      Class

Outstanding on March 15,
    2006Common Stock, par value
    $0.01 per share


10,083,828 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


141B


UNRESOLVED STAFF
    COMMENTS


272


PROPERTIES


273


LEGAL
    PROCEEDINGS


284


SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS


28II



5


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


286


SELECTED FINANCIAL
    DATA


307


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


317A


QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK


388


FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA


399


CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE


599A


CONTROLS AND
    PROCEDURES


599B


OTHER
    INFORMATION


59III



10


DIRECTORS AND
    EXECUTIVE OFFICERS OF THE REGISTRANT


5911


EXECUTIVE
    COMPENSATION


6312


SECURITY OWNERSHIP
    OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


6713


CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS


7014


PRINCIPAL
    ACCOUNTANT FEES AND SERVICES


73IV



15


EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES


74    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
  ® ®
  ® (B)
  ® ®
  Our Drug
    Discovery and Development Programs
  Program

Status

Planned Activities

Commercial RightsIMPDH Inhibitor (AVN944)

U.S. Phase I ongoing

U.S. Phase I solid tumor
    study initiated by end of 2006

AvalonB-catenin
    Pathway Inhibitors

Lead optimization

Optimize and select a candidate
    for preclinical development in 2006

AvalonAurora Kinase Pathway Inhibitors

Lead optimization

Optimize and select a candidate
    for preclinical development in 2006

AvalonTherapeutic Antibodies

Novel target identified

Identify active antibodies in 2006

Avalon/Medarex  3




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##### 



AVN944
    Program
    ® in vitro in
    vivo
  B-Catenin
    Program
  B B ® B B B ® B
  Aurora
    Kinase Program
  ®
  Antibody
    Development
  ® in vivo
 4




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##### 



Our
    Technologies
  ® ® ® ® ® ®
  ®
  ® ® de novo ®
  Our
    Strategy
    
    Develop our anticancer therapeutic
    candidates.  We began conducting a
    U.S. Phase I trial for AVN944 in hematological cancer
    patients in January 2006. 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 conventional methods.
    Discover new therapeutic candidates using our proprietary
    AvalonRx®
    technology.  We use
    AvalonRx®
    to discover compounds that affect the expression levels of genes
    identified by methods such as: (1) RNA interference, or
    RNAi, knockdown of selected targets; (2) compound-specific
    activity; and (3) disease pathology. We use
    AvalonRx®
    for target identification and high-throughput screening,
    selection of leads and optimization of development candidates,
    compound analysis and efficacy prediction. We intend to apply
    AvalonRx®
    to explore the development of therapeutics against proprietary
    Avalon cancer targets and well-known cancer targets proven to be
    difficult for conventional technologies to address.
    Apply
    AvalonRx®
    to select and add value to in-licensing
    candidates.  AvalonRx®
    provides us with unique insight into the properties of compounds
    and their potential as therapeutics. We intend to use
    AvalonRx®
    to analyze and in-license compounds discovered by others to
    identify: (1) mechanisms of action; (2) the type of
    cancer most likely to respond to the in-licensing candidate; and
    (3) the optimal dose and dose schedule for the in-licensing
    candidate. With these capabilities, we believe that we are
    better positioned to select 5




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®
  
    Leverage our technology by collaborating with
    partners.  We have formed partnerships to develop
    novel therapeutics and have also formed discovery partnerships
    with MedImmune, Novartis and Medarex. We may form new
    partnerships for both cancer and other therapeutic fields to:
    (1) discover novel drug candidates for selected targets;
    (2) identify drug targets or biomarkers; (3) select
    and optimize lead candidates in aid of our partners
    discovery efforts; and (4) improve the design of clinical
    trials and the analysis of patients drug response. In each
    case, we intend to receive upfront payments for access to our
    technology, research and development funding, additional fees
    for the achievement of development milestones, and royalties on
    sales of products developed in the collaboration.  Collaborative
    Relationships
  MedImmune
  ®
        Novartis
  ®
   6




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##### 



Medarex
  ®
    Other
    Collaborations
      Patents,
    Licenses and Proprietary Rights
   7




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##### 




    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.  Vertex
    license
          Patent
    rights; licenses
     8




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##### 



Trade
    secrets
    Competition
        Manufacturing
    and Supply
      Marketing
    and Sales
   9




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##### 



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 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.  In Phase I clinical trials,
    a small number of volunteers are tested with the drug to
    determine the drugs safety and tolerability and includes
    biological analyses to determine the availability and metabolism
    of the active ingredient following administration.
    Phase II.  Phase II clinical trials
    involve administering the drug to individuals who suffer from
    the target disease or condition to determine the drugs
    potential efficacy and ideal dose. These clinical trials are
    typically well controlled, closely monitored, and conducted in a
    relatively small number of patients, usually involving no more
    than several hundred subjects.
    Phase III.  Phase III clinical trials
    are performed after preliminary evidence suggesting
    effectiveness of a drug has been obtained and safety,
    tolerability, and an ideal dosing regimen have been established.
    Phase III clinical trials are intended to gather additional
    information about the effectiveness and safety that is needed to
    evaluate the overall benefit-risk relationship of the drug and
    to complete the information needed to provide adequate
    instructions for the use of the drug. Phase III trials
    usually include from several hundred to several thousand
    subjects. 10




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New
    Drug Application
         11




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##### 



Post
    Approval Phase
        Hatch-Waxman
    Act
      Pediatric
    Exclusivity
   12




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##### 



Orphan
    Drug Designation and Exclusivity
      Foreign
    Regulation
      Other
    Regulations
  and/or
   13




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Employees
    Organization;
    Principal Executive Offices
  (301) 556-9900.
  Available
    Information
  Form 10-K, Form 10-Q Form 8-K,
 ITEM 1A.  RISKS
    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®;
    select and develop in-licensed drug candidates;
    build and maintain a strong intellectual property portfolio;
    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; 14




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
    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;
    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.
    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.
   15




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##### 



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.
      
    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; 16




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##### 




    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.      If we
    fail to enter into new strategic collaborations, we will not
    grow our revenue and our ability to exploit
    AvalonRx®
    to discover drugs for diseases other than cancer will be
    limited.
   17




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##### 



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
  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.   18




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##### 



Our
    chemical library may be insufficient to meet our
    needs.
  ®
  We
    face intense competition in the development and
    commercialization of our drug candidates.
          
    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.
     19




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##### 



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.
    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. 20




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##### 



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.    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.
   21




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##### 



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.
          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 and know-how.
  ®
 22




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##### 



®
      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.
     23




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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.
       24




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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.
     25




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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.
     26




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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    ITEM 2.
    PROPERTIES   27




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##### 



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


Low2005:Third Quarter(September
    29  September 30)

$
10.75


$
8.26Fourth Quarter(October
    1  December 31)

$
9.25


$
4.26     Stockholders
    Dividends
    Securities
    Authorized for Issuance under Equity Compensation
    Plans
  Form 10-K.
  Unregistered
    Sales of Securities
    Use of
    Proceeds
  Form S-1 (333-124565)
 28




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##### 




    Underwriting discounts and
    commissions  $2,021,250
    Other expenses  $1,753,899
    Total expenses  $3,775,149      
    clinical development of AVN944;
    development of additional lead programs, including our
    B-catenin and Aurora kinase programs;
    discovery of new drug candidates;
    acquisition, licensing and protection of intellectual property
    rights; and
    working capital, capital expenditures and other general
    corporate purposes.    Form S-1,
  Issuer
    Purchases of Equity Securities
   29




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##### 



ITEM 6.
    SELECTED
    FINANCIAL DATA  Form 10-K.
  December 31,2005


2004


2003


2002


2001(In thousands, except per share
    data)SUMMARY STATEMENTS OF
    OPERATIONS:Revenue

$
1,544


$
1,900


$
100


$



$
320Operating expenses:Research and development


15,789



10,680



12,510



12,832



8,578General and administrative


5,066



4,325



4,567



4,434



3,100Total operating expenses


20,855



15,005



17,077



17,266



11,678Loss from operations


(19,311
)


(13,105
)


(16,977
)


(17,266
)


(11,358
)Other income (expense):Interest income


503



327



678



1,157



369Interest expense


(1,147
)


(890
)


(701
)


(52
)


(264
)Other


663



8



(75
)


5



(1
)Other income (expense), net


19



(555
)


(98
)


1,110



104Net loss

$
(19,292
)

$
(13,660
)

$
(17,075
)

$
(16,156
)

$
(11,254
)Dividends on and accretion of
    convertible preferred stock


(1,111
)


(1,449
)


(1,449
)


(1,401
)


(219
)Net loss attributed to common
    shareholders


(20,403
)


(15,109
)


(18,524
)


(17,557
)


(11,473
)Net loss per
    share  basic and diluted

$
(9.58
)

$
(117.65
)

$
(146.29
)

$
(139.61
)

$
(91.69
)Weighted average number of shares
    of common stock outstanding


2,129,388



128,417



126,630



125,757



125,125   As of
    December 31,2005


2004


2003


2002


2001(In thousands)SUMMARY BALANCE SHEET
    DATA:Cash, cash equivalents and
    marketable securities(1)

$
27,748


$
14,309


$
27,720


$
39,692


$
58,372Working capital


17,070



5,545



15,300



34,969



49,304Total assets


41,282



29,292



46,055



53,112



62,625Total debt


10,944



13,631



16,234



4,097



1,477Accumulated deficit


(85,602
)


(65,949
)


(51,454
)


(33,553
)


(16,605
)Total stockholders equity


25,883



(65,971
)


(51,435
)


(33,388
)


(16,571
)     (1)
    
    Includes restricted cash of $6.3 million, $6.1 million
    and $6.7 million at December 31, 2005, 2004 and 2003,
    respectively. 30




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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
     31




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##### 



B ®
  B
  
    the methods we employ through
    AvalonRx®
    are new and unproven;
    preclinical and clinical testing are time consuming, expensive
    and uncertain processes; and
    we intend to rely on third parties to conduct clinical trials
    for our drug candidates and those third parties may not perform
    satisfactorily.    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
   32




---



##### 



Form 10-K.
  Revenue
    Recognition
    Accrued
    Expenses
    Stock-Based
    Compensation
  Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling
    Goods or Services.
   33




---



##### 



Results
    of Operations
  Year
    Ended December 31, 2005 Compared to Years Ended
    December 31, 2004 and 2003
  Revenue.
  Research and Development.
        General and Administrative.
      Interest Income.
 34




---



##### 



Interest Expense.
  Liquidity
    and Capital Resources
  Overview
    
    fund our research and development 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.
  Investing Activities.
  Financing Activities.
 35




---



##### 



Credit
    Arrangements
      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; 36




---



##### 




    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


3-5


More ThanContractual
    Obligations

Total


1 Year


Years


Years


5 YearsLong-term debt(1)

$
14,074


$
2,950


$
5,623


$
2,935


$
2,566Operating lease obligations(2)


5,439



701



2,231



1,601



906Cooperative research and
    development agreements(3)


57



57











Total(4)

$
19,570


$
3,708


$
7,854


$
4,536


$
3,472     (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
    table assume a fixed rate of 4.49% that was in effect on
    December 31, 2005. 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,
    2005 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. 37




---



##### 



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

$
9.7 millionShort-term investments

$
10.9 millionLong-term investments

$
0.8 millionRestricted cash

$
6.3 million   available-for-sale
   38




---



##### 



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
           Ernst &
    Young LLP
     39




---



##### 



Avalon
    Pharmaceuticals, Inc.
   Balance Sheets
  December 31,2005


2004(In thousands, except share and
    per share data)ASSETSCurrent assets:Cash and cash equivalents

$
9,732


$
2,251Short-term marketable securities


10,922



5,808Accounts receivable


794



258Interest receivable


201



161Prepaid expenses


833



253Deposits


102



102Total current assets


22,584



8,833Restricted cash and marketable
    securities


6,313



6,100Property and equipment, net


10,997



13,398Long-term marketable securities


781



150Deposits


205



306Deferred financing costs


401



505Total assets

$
41,282


$
29,292LIABILITIES AND
    STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
1,098


$
379Accrued expenses and other current
    liabilities


913



198Deferred revenue


1,273



Current portion on long-term debt


2,230



2,711Total current liabilities


5,514



3,288Deferred rent


468



446Long-term deferred revenue, net of
    current portion


650



Long-term debt, net of current
    portion


8,714



10,920Other long-term liabilities


53



Series B Purchase Stock
    Warrants






1,111Series A redeemable
    convertible preferred stock, $0.01 par value;
    6,000,000 shares authorized; 0 and
    5,577,500 shares issued and outstanding at
    December 31, 2005 and 2004, respectively






11,155Series B redeemable
    convertible preferred stock, $0.01 par value;
    23,000,000 shares authorized; 0 and
    20,126,997 shares issued and outstanding at
    December 31, 2005 and 2004, respectively






68,343Stockholders equity (deficit):Common stock, $0.01 par value;
    60,000,000 shares authorized; 8,407,376 and
    128,690 shares issued and outstanding at December 31,
    2005 and 2004, respectively


84



1Paid-in capital


111,677



9Deferred stock compensation


(250
)


Other comprehensive loss


(26
)


(32
)Accumulated deficit


(85,602
)


(65,949
)Total stockholders equity
    (deficit)


25,883



(65,971
)Total liabilities, redeemable
    convertible preferred stock and stockholders equity
    (deficit)

$
41,282


$
29,292    40




---



##### 



Avalon
    Pharmaceuticals, Inc.
   Statements of Operations
  Year Ended
    December 31,2005


2004


2003(In thousands, except per share
    data)Revenues

$
1,544


$
1,900


$
100Costs and expenses:Research and development


15,789



10,680



12,510General and administrative


5,066



4,325



4,567Total costs and expenses


20,855



15,004



17,078Loss from operations


(19,311
)


(13,104
)


(16,978
)Other income (expense):Interest income


503



327



678Interest expense


(1,147
)


(890
)


(701
)Other


663



8



(75
)Total other income (expense):


19



(554
)


(98
)Net Loss

$
(19,292
)

$
(13,659
)

$
(17,076
)Accretion of convertible preferred
    stock


(1,111
)


(1,449
)


(1,449
)Net loss attributed to common
    stockholders

$
(20,403
)

$
(15,108
)

$
(18,525
)Net loss attributed to common
    stockholders per common share  basic and diluted

$
(9.58
)

$
(117.65
)

$
(146.29
)Weighted average number of common
    shares  basic and diluted


2,129,388



128,417



126,630    41




---



##### 



Avalon
    Pharmaceuticals, Inc.
   Statements of Redeemable Convertible Preferred Stock and
    Stockholders Deficit
  Redeemable Convertible Preferred
    Stock











Additional


Deferred


Other





TotalSeries A


Series B


Convertible


Common Stock


Paid-In


Stock


Comprehensive


Accumulated


StockholdersShares


Amount


Shares


Amount


Notes


Shares


Amount


Capital


Compensation


Income (Loss)


Deficit


Equity (Deficit)(In thousands, except share
    data)Balance at December 31,
    2002


5,577,500


$
11,155



20,126,997


$
65,444







125,954



1


$
9


$
(38
)

$
192


$
(33,553
)

$
(33,387
)Amortization of Series B
    offering costs














874















(48
)










(825
)


(874
)Amortization of Series B
    purchase stock warrant














575















44















44Issuance of common stock to
    employee upon exercise of stock options






















1,230







3















3Deferred stock compensation






























1



(1
)










Amortization of deferred stock
    compensation


































39











39Net loss










































(17,076
)


(17,076
)Net unrealized gain on available
    for sale securities






































(183
)






(183
)Net comprehensive loss














































(17,260
)Balance at December 31,
    2003


5,577,500



11,155



20,126,997



66,893







127,184



1



9







9



(51,454
)


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






















1,506







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



68,342







128,690



1



9







(32
)


(65,949
)


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






















3,521







9















9Deferred stock compensation






























379



(379
)










Amortization of deferred stock comp


































129











129Proceeds from convertible notes
    financing and related accrued interest of $267,140


















5,293



























5,293Amortization of Series B
    offering costs














656















(295
)










(361
)


(656
)Amortization of Series B
    purchase stock warrant














456































Conversion 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
)


(4,108
)






273,826



2



6,106















6,108Conversion of preferred stock,
    convertible notes and related accrued interest upon IPO


(4,577,500
)


(9,155
)


(18,936,386
)


(65,346
)


(5,293
)


5,251,339



53



79,741















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





$







$



$




8,407,376


$
84


$
111,677


$
(250
)

$
(26
)

$
(85,602
)

$
(25,883
)    42




---



##### 



Avalon
    Pharmaceuticals, Inc.
   Statements of Cash Flows
  Year Ended
    December 31,2005


2004


2003(In thousands)Operating activitiesNet loss

$
(19,292
)

$
(13,659
)

$
(17,076
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation


2,644



2,768



2,437Non cash interest expense


623



385



287Warrant amortization






32



44Stock compensation


129



3



39Loss on disposal of assets






5



80Amortization of premium on
    investments


148



527



798Changes in operating assets and
    liabilities:Accounts receivable


(475
)


266



817Prepaid expenses


(580
)


91



567Other assets






213



(404
)Accounts payable


719



63



(2,408
)Accrued liabilities


766



(69
)


(178
)Deferred revenue


1,923



(500
)Deferred rent


22



41



113Net cash used in operating
    activities


(13,373
)


(9,832
)


(14,884
)Investing activitiesPurchases of marketable securities


(24,771
)


(19,972
)


(28,223
)Proceeds from sale of marketable
    securities


18,671



30,002



35,981Purchases of property and equipment


(243
)


(110
)


(7,488
)Net cash provided by (used in)
    investing activities


(6,343
)


9,920



270Financing activitiesPrincipal payments on line of
    credit


(1,487
)


(1,428
)


(1,865
)Proceeds from borrowings on line
    of credit










2,015Proceeds from issuance of common
    stock, net


25,109



3



3Proceeds from borrowings on bond
    payable










12,000Principal payments on bond payable


(1,200
)


(1,200
)


Deferred financing costs


(251
)


(259
)


(826
)Proceeds from issuance convertible
    notes


5,026







Net cash provided by (used in)
    financing activities


27,197



(2,884
)


11,327Net increase (decrease) in cash
    and cash equivalents


7,481



(2,796
)


(3,287
)Cash and cash equivalents at
    beginning of year


2,251



5,047



8,334Cash and cash equivalents at end
    of year

$
9,732


$
2,251


$
5,047Supplemental informationCash paid for interest

$
1,147


$
473


$
467    43




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS
 December 31, 2005
  1.
    Organization      2.
    Initial
    Public Offering  Form S-1 No. 333-124565)
  3.
    Summary
    of Significant Accounting Policies  Development-Stage
    Company
  Accounting and Reporting by Development Stage
    Enterprises.
  Use of
    Estimates
    Cash
    and Cash Equivalents
   44




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Marketable
    Securities
  available-for-sale. other-than-temporary available-for-sale other-than-temporary
  Property
    and Equipment
      December 31,2005


2004Scientific equipment

$
6,503


$
6,268Computer equipment


1,234



1,229Leasehold improvements


12,093



12,093Furniture and fixtures


443



44020,273



20,030Less accumulated depreciation


9,276



6,632Property and equipment, net

$
10,997


$
13,398     Deferred
    Financing Costs
    Revenue
    Recognition
   45




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Research
    and Development Costs
    Income
    Taxes
    Restricted
    Cash and Investments
    Stock-Based
    Compensation
  Accounting for
    Stock Issued to Employees Accounting for Equity Instruments that are
    Issued to Other Than Employees for Acquiring, or in Conjunction
    with Selling, Goods or Services. Accounting for Stock-Based
    Compensation
 46




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     Year Ended
    December 31,2005


2004


2003Actual net loss attributable to
    common stockholders:As reported

$
(20,403
)

$
(15,108
)

$
(18,525
)Add: Stock compensation included
    in reported net loss attributable to common stockholders


129



3



39Deduct: Total stock-based employee
    compensation expense determined under fair value-based method
    for all awards


(681
)


(126
)


(208
)Pro forma net loss attributable to
    common stockholders

$
(20,955
)

$
(15,231
)

$
(18,695
)Net loss attributable to common
    stockholders per common share:Basic and
    diluted  as reported

$
(9.58
)

$
(117.65
)

$
(146.29
)Basic and
    diluted  pro forma

$
(9.84
)

$
(118.61
)

$
(147.63
)Weighted average number of common
    shares  basic and diluted


2,129,388



128,417



126,630     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
   47




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Segment
    Information
  Disclosure about Segments of an
    Enterprise and Related Information.
  Recent
    Accounting Pronouncements
  Share-Based Payment fair-value-based
     48




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   4.
    Marketable
    Investments    2005


2004Unrealized








UnrealizedAmortized


Gains





Amortized


GainsAvailable for Sale

Cost


(Losses)


Fair Value


Cost


(Losses)


Fair ValueInvestmentsU.S. Treasury and agencies

$
782


$
(1
)

$
781


$
1,072


$



$
1,072Corporate debt securities


10,949



(27
)


10,922



4,905



(20
)


4,88511,731



(28
)


11,703



5,977



(20
)


5,957Restricted
    investmentsCash and cash equivalents


6,313







6,313



198







198U.S. Treasury and agencies


0







0



4,613



(4
)


4,609Corporate debt securities














1,301



(8
)


1,2936,313







6,313



6,112



(12
)


6,100$
18,044


$
(28
)

$
18,016


$
12,089


$
(32
)

$
12,057     2005


2004Maturity

Amortized Cost


Fair Value


Amortized Cost


Fair ValueLess than one year

$
17,262


$
17,235


$
11,686


$
11,658Due in one to two years


782



781



404



399Total

$
18,044


$
18,016


$
12,090


$
12,057   5.
    Debt    December 31,2005


2004Maryland Industrial Development
    Financing Authority Taxable Variable Rate Demand Revenue Bond

$
9,600


$
10,800Equipment financing


1,359



2,86910,959



13,669Less current portion


(2,230
)


(2,710
)Less discount related to warrants


(15
)


(39
)Long-term debt

$
8,714


$
10,920   Maryland
    Industrial Development Financing Authority (MIDFA) Taxable
    Variable Rate Demand Revenue Bond
   49




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        Equipment
    Financing
  36-month
       50




---



##### 



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


2,2302007


1,5182008


1,2112009


1,2002010


1,200Thereafter


3,600$
10,959   6.
    Redeemable
    Convertible Preferred Stock  Series A
    Redeemable Convertible Preferred Stock
        Series B
    Redeemable Convertible Preferred Stock
         51




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    7.
    Stockholders
    Equity (Deficit)  Reverse
    Stock Split
  1-for-5 1-for-1.6
  Common
    Stock
         52




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Stock
    Options
          Weighted-AverageExerciseShares


PriceOutstanding at December 31,
    2002


532,959


$
2.85Granted


35,479



3.16Exercised


(1,234
)


2.71Cancelled or expired


(32,182
)


3.16Outstanding at December 31,
    2003


535,022



2.85Granted


46,985



3.20Exercised


(1,508
)


1.73Cancelled or expired


(24,705
)


3.08Outstanding at December 31,
    2004


555,794



2.87Granted


746,440



5.86Exercised


(3,520
)


2.49Cancelled or expired


(24,876
)


3.06Outstanding at December 31,
    2005


1,273,838



4.62     Weighted-AverageNumber


ExerciseExercisable


Price2003


305,851


$
2.682004


388,477



2.762005


472,779



2.94  53




---



##### 



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


Weighted-





Weighted-Average


Average





AverageNumber


Exercise


Remaining


Number


ExerciseExercise Prices

Outstanding


Price


Contractual Life


Exercisable


Price$1.60


110,511


$
1.60



4.5



107,388


$
1.60$3.20


416,887



3.20



6.5



349,771



3.20$5.12 - $5.76


240,857



5.50



9.9



0



0$5.76 - $6.40


505,583



6.03



9.8



15,620



6.241,273,838











472,779     2005


2004


2003Volatility


66.2
%


56.1
%


56.1
%Dividend yield


0
%


0
%


0
%Average risk-free interest rate


4.00
%


3.41
%


3.25
%Expected term


4.7 years



5.0 years



5.0 years   Stock
    Warrants
    8.
    Income
    Taxes    December 31,2005


2004(in thousands)Deferred tax assets:Net operating loss carryforwards

$
19,492


$
3,066Capitalized research and
    development expenses


8,596



14,023Start-up
    costs


3,218



7,078Deferred revenue






Deferred rent expense


181



172Accrued payroll


60



50Depreciation


276



141Other


75



45Deferred tax liabilities:Depreciation






Valuation allowance


(31,898
)


(24,575
)Net deferred tax assets

$



$
  54




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
         2005


2004


2003Federal tax at statutory rates

$
(6,559
)

$
(4,644
)

$
(5,806
)State taxes, net of federal benefit


(876
)


(630
)


(786
)Change in valuation allowance


7,322



5,267



6,573Permanent differences


113



7



19Provision for income taxes

$



$



$
   9.
    Related
    Party Transactions    10.
    Commitments
    and Contingencies    10-year
   55




---



##### 



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


Sublease income2006


701



2422007


722



402008


743



2009


766



2010


789



Thereafter


1,719



Total

$
5,440


$
282.00   11.
    Collaborations
    and Licenses         56




---



##### 





AVALON
    PHARMACEUTICALS, INC.




NOTES TO
    FINANCIAL STATEMENTS  (Continued)












®




|    |                          
|--- | -------------------------
|12. | Employee
    Benefit Plan





57



---



##### 





AVALON
    PHARMACEUTICALS, INC.




NOTES TO
    FINANCIAL STATEMENTS  (Continued)






|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|13. | Quarterly
    Financial Information (Unaudited) (in thousands, except per
    share data)



|                                                                                      |  |               |        |   |         |   |        |              |  |   |             |   |  |   |        |  
|------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | -
|                                                                                      |  | Quarter Ended |       
|                                                                                      |  | March 31      |        |   | June 30 |   |        | September 30 |  |   | December 31 |  
|                                                                                     
|2005 Summary statement of
    operations:                                             |  |               |        |   |         |   |        |              |  |   |             |   |  |   |        |  
|Total revenues                                                                        |  | $             |       |   |         | $ |       |              |  | $ | 748         |   |  | $ | 796    |  
|Loss 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 common
    stockholders per common share  basic and diluted |  |               | (70.49 | ) |         |   | (33.56 | )            |  |   | (29.50      | ) |  |   | (0.37  | )
|2004 Summary statement of
    operations:                                             |  |               |        |   |         |   |        |              |  |   |             |   |  |   |        |  
|Total revenues                                                                        |  | $             | 375    |   |         | $ | 375    |              |  | $ | 375         |   |  | $ | 775    |  
|Loss from operations                                                                  |  |               | (3,313 | ) |         |   | (3,428 | )            |  |   | (3,487      | ) |  |   | (2,876 | )
|Net loss attributable to common
    stockholders                                      |  |               | (3,449 | ) |         |   | (3,564 | )            |  |   | (4,025      | ) |  |   | (3,345 | )
|Net loss attributable to common
    stockholders per common share  basic and diluted |  |               | (26.9  | ) |         |   | (27.75 | )            |  |   | (31.33      | ) |  |   | (26.02 | )





|    |                                 
|--- | --------------------------------
|14. | Subsequent
    Event (Unaudited)





58



---



##### 



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
    AND EXECUTIVE OFFICERS OF THE REGISTRANT  Directors
    and Executive Officers
    Name

Age

PositionKenneth C. Carter, Ph.D.


46


President, Chief Executive Officer
    and DirectorGary Lessing


40


Executive Vice President and Chief
    Financial OfficerThomas G. David


59


Senior Vice President of
    Operations and General CounselJames H. Meade, Ph.D.


57


Vice President of Business
    DevelopmentDavid K. Bol, Ph.D.


40


Vice President of Pharmaceutical
    DevelopmentAlan G. Walton, Ph.D., D.Sc.
    *, **


69


ChairmanMichael R. Kurman, M.D. +


54


DirectorBradley G. Lorimier


60


DirectorIvor Royston, M.D. *, +


60


DirectorWilliam A. Scott, Ph.D. **


65


DirectorPatrick Van Beneden **


43


DirectorWilliam H. Washecka


58


DirectorRaymond J. Whitaker, Ph.D. *,
    +


58


Director     *
    
    Member of Audit Committee**
    
    Member of Compensation Committee+
    
    Member of Nominating and Corporate Governance Committee 59




---



##### 



Kenneth C. Carter, Ph.D.
  Gary Lessing
  Thomas G. David
  James H. Meade, Ph.D.
  David K. Bol, Ph.D.
  Alan G. Walton, Ph.D., D.Sc.
  Michael R. Kurman, M.D.
 60




---



##### 



Bradley G. Lorimier
  Ivor Royston, M.D. 1990-2000,
  William A. Scott, Ph.D.
  Patrick Van Beneden
  William H. Washecka 2001-2002,
  Raymond J. Whitaker, Ph.D.
 61




---



##### 



Audit
    Committee Financial Expert
    Section 16(a)
    Beneficial Ownership Reporting Compliance
      
    Mr. Glen Farmer, who during 2005 served as our principal
    accounting officer, filed a late initial report of ownership on
    Form 3; and
    Euclid SR Partners, L.P. and EuclidSR Biotechnology Partners,
    L.P. filed a late initial report of ownership on Form 3 and
    a late Form 4 relating to (i) the automatic conversion
    of Avalons preferred stock and convertible notes into
    Avalon common stock upon the closing of Avalons initial
    public offering and (ii) the purchase of shares of
    Avalons common stock in Avalons initial public
    offering.  Code of
    Ethics
  http://www.avalonrx.com Form 8-K
 62




---



##### 



ITEM 11.
    EXECUTIVE
    COMPENSATION  Executive
    Compensation Tables
  Summary Compensation Table.
  SUMMARY
    COMPENSATION TABLE
  Long TermCompensationFiscal


Annual Compensation


Securities


All OtherName and Principal
    Position

Year


Salary


Bonus


Underlying Options


Compensation(1)Kenneth C. Carter, Ph.D.


2005


$
324,000


$
180,000



255,091


$
12,000President, Chief Executive


2004


$
304,500










$
6,832Officer and DirectorGary Lessing


2005


$
231,000


$
117,000



126,799


$
18,000Executive Vice President


2004


$
215,250










$
10,707and Chief Financial OfficerThomas G. David


2005


$
231,000


$
96,000



45,587


$
9,000Senior Vice President and


2004


$
236,250










$
11,564General CounselJames H. Meade, Ph.D.


2005


$
200,000


$
69,000



37,058


$
15,000Vice President of Business


2004


$
200,000







25,000


$
9,097DevelopmentDavid K. Bol, Ph.D.


2005


$
188,000


$
87,000



55,764


$
17,000Vice President of Pharmaceutical


2004


$
157,879







18,140


$
9,826Development     (1)
    
    Amounts shown are for premiums paid by the company for health,
    dental, supplemental disability and term life insurance.  Option Grants in 2005.
  Potential RealizableNumber of











Value at AssumedSecurities


Percentage of








Annual Rates ofUnderlying


Options Granted


Exercise or





Stock Price AppreciationOptions


to Employees in


Base Price


Expiration


for Option TermName

Granted


2005


($/Share)(1)


Date


5%


10%Kenneth C. Carter, Ph.D.


146,670



22
%

$
6.00



10/26/2016


$
625,113


$
1,630,780108,421



16
%

$
5.50



11/30/2016


$
423,586


$
1,105,042Gary Lessing


43,543



7
%

$
6.00



10/26/2016


$
185,582


$
484,14283,256



13
%

$
5.50



11/30/2016


$
325,270


$
484,557Thomas G. David


34,834



5
%

$
6.00



10/26/2016


$
148,464


$
203,85010,753



2
%

$
5.50



11/30/2016


$
73,152


$
190,838James H. Meade, Ph.D.


18,334



3
%

$
6.00



10/26/2016


$
78,140


$
203,85018,724



3
%

$
5.50



11/30/2016


$
73,152


$
190,838David K. Bol, Ph.D.


18,141



3
%

$
6.40



06/20/2015


$
73,016


$
185,03717,920



3
%

$
6.00



10/26/2016


$
76,376


$
199,24719,703



3
%

$
5.50



11/30/2016


$
76,977


$
200,806  63




---



##### 



(1)
    
    Prior to the completion of our initial public offering, in the
    absence of a public trading market for our stock, the exercise
    price per share of each option was equal to the fair market
    value of our common stock on the date of grant as determined by
    our board of directors.  Aggregate Option Exercises in 2005 and 2005 Year-End
    Options.
  Shares














Value of UnexercisedAcquired on


Value


Number of Unexercised


In-the-Money
    OptionsExercise


Realized


Options at Year End


at Year End ($)(1)Name

(#)


($)


Exercisable


Unexercisable


Exercisable


UnexercisableKenneth C. Carter, Ph.D.










180,081



275,010


$
299,105


$
25,895Gary Lessing










57,812



128,362


$
75,156


$
2,032Thomas G. David










43,281



49,806


$
76,265


$
5,485James H. Meade, Ph.D.










8,750



53,308


$
11,375


$
21,125David K. Bol, Ph.D.










6,375



55,684


$
5,340


$
2,843     (1)
    
    Calculated by multiplying the number of unexercised
    in-the-money
    options outstanding at December 31, 2005 by the difference
    between the fair market value of the underlying option shares at
    December 30, 2005, $4.50, and the option exercise price.  Compensation
    of Directors
      out-of-pocket
   64




---



##### 



Compensation
    Committee Interlocks and Insider Participation
    Employment
    Agreements
    Kenneth C.
    Carter, Ph.D.
    Thomas G. David.
    Gary Lessing.
 65




---



##### 



James H.
    Meade, Ph.D.
    David R. Bol, Ph.D.
    Definition of Cause and Change of
    Control.
  Rule 13d-3
 66




---



##### 



Confidentiality, Assignment of Inventions and
    Non-Competition.
  ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT      Number of Shares


Percentage ofBeneficially Owned


Sharesas of March 15,


BeneficiallyName of Beneficial
    Owner

2006


Owned(1)(2)Kenneth C. Carter, Ph.D.(3)


366,988



3.1
%Gary Lessing (4)


107,339



*Thomas G. David (5)


81,896



*James H. Meade, Ph.D.(6)


30,754



*David K. Bol, Ph.D.(7)


26,972



*Alan G. Walton, Ph.D.,
    D.Sc.(8)


854,737



7.3
%Patrick Van Beneden(9)


900,609



7.7
%Michael R. Kurman, M.D.(10)


8,297



*Bradley G. Lorimier(11)


27,297



*Ivor Royston, M.D.(12)


603,537



5.1
%William A. Scott, Ph.D.(13)


13,809



*Raymond J. Whitaker, Ph.D.(14)


767,619



6.5
%William H. Washecka(15)


833



*Entities affiliated with
    Biotechnology Value Fund, L.P.(16)


866,666



7.4
%Entities affiliated with AIG
    Global Investment Corp.(17)


647,582



5.5
%Entities affiliated with EuclidSR
    Partners, L.P.(18)


767,619



6.5
%Entities affiliated with Forward
    Ventures IV Associates, LLC(19)


603,537



5.1
%Entities affiliated with GIMV
    N.V.(20)


900,609



7.7
%Entities affiliated with OBP
    Management III, L.P.(21)


854,737



7.3
%Capital Technologies CDPQ Inc.(22)


734,616



6.3
%All directors and officers as a
    group (12 persons)


3,790,688



32.3
%     *
    
    Less than one percent 67




---



##### 



(1)
    
    Beneficial ownership is determined in accordance with the rules
    of the SEC and generally includes shares of common stock to
    which the person has sole or shared voting or investment power
    with respect to shares of common stock including those shares
    that the person has the right to acquire within 60 days
    after March 15, 2006, through the exercise of any stock
    option or other right. Shares of common stock subject to options
    or rights currently exercisable or exercisable within
    60 days of March 15, 2006 are deemed outstanding for
    purposes of computing the percentage ownership of the person
    holding such option or right but are not deemed outstanding for
    purposes of computing the percentage ownership of any other
    person.(2)
    
    Based on 10,083,828 shares of Avalon common stock
    outstanding on March 15, 2006.(3)
    
    Includes 343,488 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006 and 3,750 shares of common stock held
    in trust for the benefit of Dr. Carters minor child
    for which Dr. Carter disclaims beneficial ownership.(4)
    
    Includes 107,339 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006.(5)
    
    Includes 80,896 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006.(6)
    
    Includes 30,754 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006.(7)
    
    Includes 26,972 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006.(8)
    
    Includes securities held by entities affiliated with OBP
    Management III, L.P. Dr. Walton disclaims beneficial
    ownership of the securities held by entities affiliated with OBP
    Management III, L.P. except to the extent of his pecuniary
    interest therein. Dr. Waltons business address is
    c/o Oxford
    Bioscience Partners, 315 Post Road West, Westport, CT 06880.(9)
    
    Includes securities held by entities affiliated with GIMV N.V.
    Mr. Van Beneden disclaims beneficial ownership of the
    shares held by entities affiliated with GIMV N.V. The business
    address for Mr. Van Beneden is
    c/o GIMV
    N.V., Karel Oomsstraat 37, B-2018, Antwerp, Belgium.(10)
    
    Includes 8,297 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006.(11)
    
    Includes (i) 8,880 shares of common stock, and
    (ii) 18,417 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006.(12)
    
    Includes securities held by entities affiliated with Forward
    Ventures IV Associates, LLC. Dr. Royston disclaims
    beneficial ownership of the securities held by entities
    affiliated with Forward Ventures IV Associates, LLC except
    to the extent of his pecuniary interest therein.
    Dr. Roystons business address is
    c/o Forward
    Ventures, 9393 Towne Centre Drive, Suite 200,
    San Diego, CA 92121.(13)
    
    Includes 13,809 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006.(14)
    
    Includes securities held by entities affiliated with EuclidSR
    Partners, L.P. Dr. Whitaker disclaims beneficial ownership
    of the securities held by entities affiliated with EuclidSR
    Partners, L.P. except to the extent of his pecuniary interest
    therein. Dr. Whitakers business address is
    c/o EuclidSR
    Partners, 45 Rockefeller Plaza, Suite 3240, New York, NY
    10111.(15)
    
    Includes 833 shares of common stock underlying options
    currently exercisable or exercisable within 60 days of
    March 15, 2006.(16)
    
    Includes (i) 494,072 shares of common stock held by
    BVF Investments L.L.C. (Investments),
    (ii) 188,275 shares of common stock held by
    Biotechnology Value Fund, L.P. (BVF),
    (iii) 129,513 shares of common stock held by
    Biotechnology Value Fund II, L.P. (BVF II)
    and (iv) 54,806 shares of common stock held by
    Investment 10, L.L.C. (ILL10). BVF Partners
    L.P. (BVF Partners) and BVF Inc. share voting and
    dispositive power over shares of the common stock beneficially
    owned by BVF, BVF II, Investments and those owned by ILL10,
    on whose behalf BVF Partners acts as an investment manager and,
    accordingly, BVF Partners and BVF Inc. have beneficial ownership
    of all of the shares of the common 68




---



##### 



stock owned by such parties. The address for entities affiliated
    with Biotechnology Value Fund, L.P. is One Sansome Street,
    39th Floor, San Francisco, CA 94104.(17)
    
    Includes (i) 207,358 shares of common stock held by
    Commerce & Industry Issuance Company,
    (ii) 125,445 shares of common stock held by AIG
    Horizon Partners Fund, L.P., (iii) 102,511 shares of
    common stock held by AIG Horizon
    Side-by-Side
    Fund L.P., and (iv) 48,368 shares of common stock
    held by AIG Private Equity Partners I L.P. Pursuant to
    individual investment management agreements entered into with
    each of the affiliated entities, AIG Global Investment Corp.
    exercises voting and investment power over these shares through
    the members of its investment committee. In addition, each of
    these entities retains the right to exercise investment and
    voting power over their respective shares. The address for the
    entities affiliated with AIG Global Investment Group is
    c/o AIG
    Global Investment Corp., 599 Lexington Avenue, 25th Floor,
    New York, NY 10022.(18)
    
    Includes (i) 378,569 shares of common stock and
    3,250 shares of common stock underlying options currently
    exercisable or exercisable within 60 days of March 15,
    2006 held by EuclidSR Partners, L.P. and
    (ii) 378,569 shares of common stock and
    3,250 shares of common stock underlying options currently
    exercisable or exercisable within 60 days of March 15,
    2006 held by EuclidSR Biotechnology Partners, L.P. The address
    for the entities affiliated with EuclidSR Partners, L.P. is
    c/o EuclidSR
    Partners, 45 Rockefeller Plaza, Suite 3240, New York, NY
    10111.(19)
    
    Includes (i) 421,461 shares of common stock and
    6,500 shares of common stock underlying options currently
    exercisable or exercisable within 60 days of March 15,
    2006 held by Forward Ventures IV, L.P., and
    (ii) 35,729 shares of common stock held by Forward
    Ventures IV, B, L.P. Forward Ventures IV Associates, LLC is
    the general partner of Forward Ventures IV, L.P. and Forward
    Ventures IV, B, L.P. Voting and investment power over these
    shares is shared by the managing members of Forward Venture
    Associates, including Dr. Ivor Royston. The address for the
    entities affiliated with Forward Ventures IV Associates,
    LLC is
    c/o Forward
    Ventures, 9393 Towne Centre Drive, Suite 200,
    San Diego, CA 92121.(20)
    
    Includes (i) 785,991 shares of common stock and
    5,526 shares of common stock underlying options currently
    exercisable or exercisable within 60 days of March 15,
    2006 held by GIMV N.V., and (ii) 105,616 shares of
    common stock and 976 shares of common stock underlying
    options currently exercisable or exercisable within 60 days
    of March 15, 2006 held by Adviesbeheer GIMV Life Sciences
    N.V. GIMV N.V. exercises voting and investment power over these
    shares through the members of its investment committee. The
    address for GIMV N.V. is Karel Oomsstraat 37, B-2018, Antwerp,
    Belgium.(21)
    
    Includes (i) 673,261 shares of common stock and
    10,500 shares of common stock underlying options currently
    exercisable or exercisable within 60 days of March 15,
    2006 held by Oxford Bioscience Partners III, L.P.,
    (ii) 95,954 shares of common stock held by Oxford
    Bioscience Partners (Bermuda) III L.P.,
    (iii) 63,965 shares of common stock held by Oxford
    Bioscience Partners (Adjunct) III L.P., and
    (iv) 7,960 shares of common stock held by mRNA
    Fund L.P. OBP Management III L.P. is the general
    partner of Oxford Bioscience Partners III, L.P. and Oxford
    Bioscience Partners (Adjunct) III L.P. OBP Management
    (Bermuda) III Limited Partnership is the general partner of
    Oxford Bioscience Partners (Bermuda) III L.P., and mRNA
    Partners L.P. is the general partner of mRNA Fund L.P.
    Voting and investment power over these shares is shared by the
    respective general partners of OBP Management III L.P., OBP
    Management (Bermuda) III Limited Partnership and mRNA
    Partners L.P., including Dr. Alan G. Walton. The address
    for the entities affiliated with OBP Management III, L.P.
    is
    c/o Oxford
    Bioscience Partners, 315 Post Road West, Westport, CT 06880.(22)
    
    Includes 734,616 held by Capital Technologies CDPQ Inc.
    (formerly known as Sofinov Société Financière
    DInnovation). Capital Technologies CDPQ Inc. is a
    subsidiary of Caisse de dépôt et placement du
    Québec, a legal person without share capital created by a
    special act of the Legislature of the Province de Québec.
    The address for Capital Technologies CDPQ Inc. is 1000 Place
    Jean-Paul-RioPelle, Montreal Quebec HQ2 2B3. 69




---



##### 



Equity
    Compensation Plan Information
    (a)


(b)


(c)Number of SecuritiesRemaining Available forNumber of Securities





Future Issuance Underto be Issued Upon


Weighted- Average


Equity CompensationExercise of


Exercise Price of


Plans (ExcludingOutstanding Options,


Outstanding Options,


Securities Reflected inPlan Category

Warrants and Rights


Warrants and Rights


Column (a)Equity compensation plans approved
    by security holders(1)


1,656,548


$
7.49



277,351Equity compensation plans not
    approved by security holders


0



N/A



0Total


1,656,548


$
7.49



277,351     (1)
    
    Consists of shares of common stock to be issued upon exercise of
    outstanding options granted under our Amended and Restated 1999
    Stock Plan and our 2005 Omnibus Long-Term Incentive Plan. Of
    these plans, the only plan under which options may be granted in
    the future is the 2005 Omnibus Long-Term Incentive Plan.  ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS  Conversion
    of Preferred Stock
    Number of Shares of CommonStock Issued Upon ConversionName

of Preferred StockEntities affiliated with AIG
    Global Investment Corp.


437,500Entities affiliated with Euclid SR
    Partners, L.P.(1)


500,000Entities affiliated with Forward
    Ventures IV Associates, LLC(2)


406,250Entities affiliated with GIMV
    N.V.(3)


628,172Entities affiliated with OBP
    Management, III L.P.(4)


503,318Capital Technologies CDPQ,
    Inc.


500,000Bradley G. Lorimier (director)


4,410Total


2,979,650     (1)
    
    Dr. Raymond J. Whitaker, a member of our board of
    directors, is a general partner of EuclidSR Partners, L.P.(2)
    
    Dr. Ivor Royston, a member of our board of directors, is a
    managing member of Forward Ventures IV Associates, LLC.(3)
    
    Patrick Van Beneden, a member of our board of directors, is
    Executive Vice President Life Sciences of GIMV N.V.(4)
    
    Dr. Alan G. Walton, a member of our board of directors, is
    a general partner of OBP Management III, L.P.  Unsecured
    Financing
   70




---



##### 



Principal


Number of Shares ofAmount of


Common Stock IssuedConvertible


upon Conversion ofName

Notes


Convertible NotesEntities affiliated with AIG
    Global Investment Corp.

$
463,192



46,182Entities affiliated with EuclidSR
    Partners, L.P.(1)


529,362



53,237Entities affiliated with Forward
    Ventures IV Associates, LLC(2)


505,918



50,940Entities affiliated with GIMV
    N.V.(3)


816,683



82,036Entities affiliated with OBP
    Management III, L.P.(4)


684,497



68,921Capital Technologies CDPQ
    Inc.


529,362



53,216Bradley G. Lorimier (director)


4,668



470Total

$
3,533,676



355,002     (1)
    
    Dr. Raymond J. Whitaker, a member of our board of
    directors, is a general partner of EuclidSR Partners, L.P.(2)
    
    Dr. Ivor Royston, a member of our board of directors, is a
    managing member of Forward Ventures IV Associates, LLC.(3)
    
    Patrick Van Beneden, a member of our board of directors, is
    Executive Vice President Life Sciences of GIMV N.V.(4)
    
    Dr. Alan G. Walton, a member of our board of directors, is
    a general partner of OBP Management III, L.P.  Line
    of Credit Facility
    Name

Line of Credit
    CommitmentEntities affiliated with AIG
    Global Investment Corp.

$
516,458Entities affiliated with EuclidSR
    Partners, L.P.(1)


590,400Entities affiliated with Forward
    Ventures IV Associates, LLC(2)


639,423Entities affiliated with GIMV
    N.V.(3)


988,719Entities affiliated with OBP
    Management III, L.P.(4)


750,000Capital Technologies CDPQ
    Inc.


590,600Bradley G. Lorimier (director)


6,940Total

$
4,082,540     (1)
    
    Dr. Raymond J. Whitaker, a member of our board of
    directors, is a general partner of EuclidSR Partners, L.P.(2)
    
    Dr. Ivor Royston, a member of our board of directors, is a
    managing member of Forward Ventures IV Associates, LLC.(3)
    
    Patrick Van Beneden, a member of our board of directors, is
    Executive Vice President Life Sciences of GIMV N.V.(4)
    
    Dr. Alan G. Walton, a member of our board of directors, is
    a general partner of OBP Management III, L.P. 71




---



##### 



Participation
    in Initial Public Offering
    Number of Shares ofCommon StockPurchased inName

Initial Public
    OfferingEntities affiliated with AIG
    Global Investment Corp.


163,900Entities affiliated with EuclidSR
    Partners, L.P.(1)


203,900Entities affiliated with Forward
    Ventures IV Associates, LLC(2)


136,000Entities affiliated with GIMV
    N.V.(3)


181,400Entities affiliated with OBP
    Management III, L.P.(4)


181,400Capital Technologies CDPQ
    Inc.


181,400Total


1,048,000     (1)
    
    Dr. Raymond J. Whitaker, a member of our board of
    directors, is a general partner of EuclidSR Partners.(2)
    
    Dr. Ivor Royston, a member of our board of directors, is a
    managing member of Forward Ventures Associates, LLC.(3)
    
    Patrick Van Beneden, a member of our board of directors, is
    Executive Vice President Life Sciences of GIMV N.V.(4)
    
    Dr. Alan G. Walton, a member of our board of directors, is
    a general partner of OBP Management III, L.P.  Registration
    Rights
    Number ofName

SharesEntities affiliated with AIG
    Global Investment Corp.


647,582Entities affiliated with EuclidSR
    Partners, L.P.(1)


757,137Entities affiliated with Forward
    Ventures IV Associates, LLC(2)


593,190Entities affiliated with GIMV
    N.V.(3)


891,607Entities affiliated with OBP
    Management III, L.P.(4)


841,139Capital Technologies CDPQ
    Inc.


734,616Entities affiliated with
    Biotechnology Value Fund, L.P.


866,666Bradley G. Lorimier (director)


8,880Total


5,340,818     (1)
    
    Dr. Raymond J. Whitaker, a member of our board of
    directors, is a general partner of EuclidSR Partners.(2)
    
    Dr. Ivor Royston, a member of our board of directors, is a
    managing member of Forward Ventures Associates, LLC.(3)
    
    Patrick Van Beneden, a member of our board of directors, is
    Executive Vice President Life Sciences of GIMV N.V.(4)
    
    Dr. Alan G. Walton, a member of our board of directors, is
    a general partner of OBP Management III, L.P. 72




---



##### 



Consulting
    Agreements
      Other
    Relationships
  fee-for-service
  Employment
    Agreements and Indemnification Agreements
    ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES      Fee Category

2005


2004Audit Fees

$
453,952


$
66,900Audit-Related Fees






Tax Fees


11,235



6,800All Other Fees






Total Fees

$
465,187


$
73,700   Audit
    Fees
  Form 10-Q Forms S-8,
 73




---



##### 



Audit-Related
    Fees
    Tax
    Fees
    All Other
    Fees
    Pre-Approval
    of Services
           PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES           74




---



##### 



SIGNATURES
    AVALON PHARMACEUTICALS, INC.
  By:
    /s/  Kenneth
    C. Carter, Ph.D.         Signature

Title

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

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

March 31, 2006/s/  Gary
    LessingGary
    Lessing

Chief Financial Officer (Principal Financial and
    Accounting Officer)

March 31, 2006/s/  Michael
    R. Kurman, M.D.Michael
    R. Kurman, M.D.

Director

March 31, 2006/s/  Bradley
    G. LorimierBradley
    G. Lorimier

Director

March 31, 2006/s/  Ivor
    Royston, M.D.Ivor
    Royston, M.D.

Director

March 31, 2006/s/  William
    A. Scott, Ph.D.William
    A. Scott, Ph.D.

Director

March 31, 2006/s/  Patrick
    Van BenedenPatrick
    Van Beneden

Director

March 31, 2006/s/  Alan
    G. Walton, Ph.D., D.ScAlan
    G. Walton, Ph.D., D.Sc.

Chairman of the Board of Directors

March 31, 2006/s/  William
    H. WasheckaWilliam
    H. Washecka

Director

March 31, 2006/s/  Raymond
    J. Whitaker, MBA, Ph.D.Raymond
    J. Whitaker, MBA, Ph.D.

Director

March 31, 2006  75




---



##### 



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
.5(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Kenneth C. Carter, Ph.D.10
.6(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Thomas G. David10
.7(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and Gary Lessing10
.8(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and James H. Meade, Ph.D.10
.9(1)

Amended and Restated Employment
    Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and David Bol, Ph.D.10
.10A(1)

Consulting Agreement, dated
    February 1, 2000, by and between Avalon Pharmaceuticals,
    Inc. and Bradley G. Lorimier10
.10B(1)

Addendum to Consulting Agreement10
.10C(1)

Second Addendum to Consulting
    Agreement, dated March 30, 200310
.10D(1)

Third Addendum to Consulting
    Agreement, dated October 25, 200410
.10E

Fourth Addendum to Consulting
    Agreement, dated January 6, 200610
.12A(1)

Consulting Agreement, dated
    August 4, 2004, by and between Avalon Pharmaceuticals, Inc.
    and Michael R. Kurman10
.13B(1)

Amendment to Consulting Agreement,
    dated January 31, 200610
.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 share10
.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(2)

Avalon Pharmaceuticals, Inc. 2005
    Omnibus Long-Term Incentive Plan   Form of
    Incentive Stock Option Agreement10
.21(2)

Avalon Pharmaceuticals, Inc. 2005
    Omnibus Long-Term Incentive Plan   Form of
    Nonqualified Stock Option Agreement10
.22(3)

Stock Election Policy for
    Non-Employee Director Fees




---



##### 



ExhibitNumber

Exhibit Title10
.23(1)

Avalon Pharmaceuticals, Inc. 2005
    Omnibus Long-Term Incentive Plan.10
.24(1)

Form of Avalon Pharmaceuticals,
    Inc. Director and Officer Indemnification Agreement.10
.23(1)

Avalon Pharmaceuticals, Inc. 2005
    Omnibus Long-Term Incentive Plan.10
.24(1)

Form of Avalon Pharmaceuticals,
    Inc. Director and Officer Indemnification Agreement.10
.25*(4)

Purchase Agreement, dated
    February 27, 2006.10
.26(4)

Registration Rights Agreement,
    dated February 27, 2006.10
.27(1)

Registration Rights Agreement,
    dated October 26, 2001, by and between Avalon
    Pharmaceuticals, Inc. and the Investors listed on
    Schedule I thereto10
.28(1)

Common Stock Warrant Agreement,
    dated August 11, 2000, by and between Avalon
    Pharmaceuticals, Inc. and Alexandria Real Estate Equities, L.P.10
.29(1)

Common Stock Warrant Agreement,
    dated March 23, 2001, by and between Avalon
    Pharmaceuticals, Inc. and Compugen, Ltd.10
.30(1)

Series B Convertible
    Preferred Stock Warrant, dated February 6, 2002, granted to
    Array Capital LLC10
.31A(1)

Series B Convertible
    Preferred Stock Warrant, dated May 14, 2001, granted to
    GATX Ventures, Inc.10
.31B(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
.32(1)

Series B Convertible
    Preferred Stock Warrant Agreement, dated August 20, 2002,
    by and between Avalon Pharmaceuticals, Inc. and General Electric
    Capital Corporation10
.33(1)

Series B Convertible
    Preferred Stock Warrant Agreement, dated December 23, 2002,
    by and between Avalon Pharmaceuticals, Inc. and General Electric
    Capital Corporation10
.34(1)

Series B Convertible
    Preferred Stock Warrant Agreement, dated June 18, 2003, by
    and between Avalon Pharmaceuticals, Inc. and General Electric
    Capital Corporation10
.35(1)

Series B Convertible
    Preferred Stock Warrant Agreement, dated December 23, 2003,
    by and between Avalon Pharmaceuticals, Inc. and General Electric
    Capital Corporation10
.36A(1)

Master Security Agreement, dated
    as of June 25, 2002, by and between General Electric
    Capital Corporation and Avalon Pharmaceuticals, Inc.10
.36B(1)

Amendment to Master Security
    Agreement dated as of June 25, 200210
.37(1)

Lease Agreement, dated
    July 15, 2002, by and between Westphalia Center II
    Limited Partnership and Avalon Pharmaceuticals, Inc.10
.38(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
.39(1)

Loan Agreement, dated
    April 1, 2003, by and between Maryland Industrial
    Development Financing Authority and Avalon Pharmaceuticals, Inc.10
.40A(1)

Letter of Credit Agreement, dated
    April 1, 2003, by and between Avalon Pharmaceuticals, Inc.
    and Manufacturers and Traders Trust Company10
.40B(1)

Amendment to Irrevocable Letter of
    Credit, dated April 1, 200410
.40C(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
.40D(1)

Second Modification Agreement by
    and between Manufacturers and Traders Trust Company, Maryland
    Industrial Development Financing Authority and Avalon
    Pharmaceuticals, Inc., dated August 9, 2005.10
.41(1)

Security Agreement, dated
    April 1, 2003, by and between Avalon Pharmaceuticals, Inc.
    and Manufacturers and Traders Trust Company10
.42(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
    Association




---



##### 



ExhibitNumber

Exhibit Title10
.43(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
.44(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
.45(1)

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

List of Subsidiaries23
.1

Consent of Ernst & Young
    LLP31
.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 200231
.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 200232
.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     *
    
    Confidential treatment has been requested for portions of this
    exhibit. These confidential portions have been omitted and were
    filed separately with the SEC.**
    
    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.