##### 





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, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.For the transition period
    from          to   Commission File Number:
    001-32629
  AVALON PHARMACEUTICALS,
    INC.
 (Exact name of Registrant as
    specified in its charter)
  Delaware

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

(I.R.S. Employer
    Identification No.)20358 Seneca Meadows Parkway,
    Germantown, Maryland(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:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, par value $0.01 per share

The NASDAQ Stock Market   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
  Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer o

Smaller reporting
    company þ(Do not check if a smaller reporting company)   Rule 12b-2 o þ
      Class

Outstanding on March 14, 2008Common Stock, par value $0.01 per share


17,033,014 shares   DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 





TABLE OF
    CONTENTS
  Part No.

Item No.

Description

Page No.I



1


BUSINESS


31A


RISK FACTORS


151B


UNRESOLVED STAFF COMMENTS


292


PROPERTIES


293


LEGAL PROCEEDINGS


294


SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS


29II



5


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


296


SELECTED FINANCIAL DATA


317


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


327A


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


398


FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


419


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE


649A


CONTROLS AND PROCEDURES


649B


OTHER INFORMATION


64III



10


DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT


6411


EXECUTIVE COMPENSATION


6512


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT


6513


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


6514


PRINCIPAL ACCOUNTANT FEES AND SERVICES


65IV



15


EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES


66    Form 10-K,
 1




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##### 



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




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##### 



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




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##### 



Our Drug
    Discovery and Development Programs
    Program

Status

Planned 2008 Activities

Commercial RightsIMPDH Inhibitor (AVN944)
    Hematologic

U.S. Phase I ongoing

Complete US Phase I hematologic cancer studies;

AvalonPancreatic

U.S. Phase II (Part A)

Phase II solid tumor study (Part B)β-catenin Pathway Inhibitors

Lead optimization

Optimize and select a candidate for preclinical development

AvalonAurora/Centrosome
    Pathway Inhibitors

Lead optimization

Name the novel target and optimize compound series

AvalonSurvivin Pathway Inhibitors

Lead Identification

Select compound series for optimization

AvalonMyc Pathway Inhibitors

Lead Identification

Select compound series for optimization

AvalonTherapeutic Antibodies

Novel target identified

Identify active antibodies

Avalon/MedarexHsp90

Lead Identification

Select compound series for optimization

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




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##### 



in vitro,
  Aurora/Centrosome
    Pathway Program
  ® in vitro,
  Survivin
    Program
    Myc
    Program
    Therapeutic
    Antibodies
  ® in vivo
  Hsp90
    Program
   5




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##### 



Our
    Technologies
  ® ®
  ®
  ®
  ®
  ®
  Our
    Strategy
    
    Advance the development of AVN944.  We began
    conducting a U.S. Phase I trial for AVN944 in hematologic
    cancer patients in January 2006. We initiated Phase II
    clinical trials in pancreatic cancer during 2007. During the
    clinical development of AVN944 and the development of all of our
    subsequent drug candidates, we intend to leverage
    AvalonRx®
    to accelerate decision-making by: (1) selecting biomarkers
    of responsive cancers, (2) identifying responsive patient
    populations for improved clinical trial design and outcome,
    (3) determining appropriate drug combinations more quickly
    than with conventional methods, and (4) developing genetic
    biomarker diagnostics.
    Advance our anti-cancer therapeutic
    programs.  We plan to advance the development of
    our lead candidates in both the β-catenin and the
    Aurora/Centrosome pathway programs to select and optimize
    pre-clinical candidates for both programs and to advance those
    candidates to clinical trials. We also plan to advance the
    Survivin pathway and the Myc pathway programs from the screening
    stage to the lead optimization stage and to identify lead
    candidates for both programs. We will continue to utilize
    AvalonRx®
    to discover and develop new therapeutic candidates against
    proprietary Avalon cancer targets and well-known cancer pathways
    proven to be difficult for conventional technologies to address. 6




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##### 




    Continue to deliver value for our partners and create new
    valuable partnerships.We have formed
    collaborations with Merck & Co., Inc., AstraZeneca PLC
    (through the acquisition of MedImmune, Inc.), Novartis
    Institutes for Biomedical Research, Inc., Medarex, Inc. and
    ChemDiv, Inc. We will continue to deliver value to our partners
    by using
    AvalonRx®
    to discover and develop compounds together with our partners. We
    may form new partnerships involving some of our cancer pipeline
    programs that would: (1) enhance clinical development and
    maximize the potential therapeutic use and commercialization of
    AVN944; (2) enhance the development and maximize the
    potential therapeutic use and commercialization of our
    β-catenin, Aurora/Centrosome pathway, Myc and Survivin
    pathway programs; (3) discover, develop and commercialize
    novel drug candidates for other undruggable targets.
    Additionally, we may form new partnerships utilizing
    AvalonRx®
    as it has very broad applications across many therapeutic fields.    Collaborative
    Relationships
  Merck &
    Co., Inc.
    ®
    first-in-class
  AstraZeneca
    PLC
     7




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##### 



ChemDiv,
    Inc.
  ® tm
  ®
    Medarex,
    Inc.
  ® ®
  Novartis
    Institutes for Biomedical Research, Inc.
  ®
 8




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##### 



® ® ®
  Patents,
    Licenses and Proprietary Rights
    Vertex
    license
         9




---



##### 



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




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##### 



Manufacturing
    and Supply
      Marketing
    and Sales
    Government
    Regulation
    Pharmaceutical
    Product Regulation
      
    Preclinical Phase.  The preclinical phase
    involves the discovery, characterization, product formulation
    and animal testing necessary to prepare an IND for submission to
    the FDA. The IND must be accepted by the FDA before the drug can
    be tested in humans. The review period for an IND submission is
    30 days, after which, if no comments are made by the FDA,
    the product candidate can be studied in Phase I clinical trials. 11




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##### 



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.
  Phase II.
  Phase III.
      New
    Drug Application
   12




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##### 



Post
    Approval Phase
       13




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##### 



Hatch-Waxman
    Act
      Pediatric
    Exclusivity
    Pediatric
    Assessment
    Orphan
    Drug Designation and Exclusivity
      Foreign
    Regulation
   14




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##### 



Other
    Regulations
  and/or
    Employees
    Organization;
    Principal Executive Offices
  (301) 556-9900.
  Available
    Information
  Form 10-K, Form 10-Q Form 8-K,
  ITEM 1A.
    RISK
    FACTORS  Risks
    Related to Our Business
  Because
    we have a limited operating history, there is a limited amount
    of information about us upon which you can evaluate our business
    and prospects.
    
    advance AVN944 through the development process; 15




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##### 




    demonstrate the advantages and reliability of our proprietary
    drug discovery and development technology,
    AvalonRx®
    ;
    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, and our
    independent registered public accounting firm has expressed
    substantial doubt as to our ability to continue as a going
    concern.
    
    fund clinical trials and seek regulatory approvals;
    pursue the development of additional product candidates;
    maintain and expand our research and development activities;
    access manufacturing and commercialization capabilities;
    implement additional internal systems and infrastructure;
    maintain, defend and expand the scope of our intellectual
    property portfolio; and
    hire additional personnel.    
    the size and complexity of research and development programs;
    our ability to attract and retain partners;
    the scope and results of preclinical testing and clinical trials;
    continued scientific progress in our research and development
    programs;
    the time and expense involved in seeking regulatory approvals;
    competing technological and market developments;
    acquisition, licensing and protection of intellectual property
    rights; and
    the cost of establishing manufacturing capabilities and
    conducting commercialization activities.   16




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##### 



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.
    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 ® ® ®
 17




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##### 



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;
    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.     18




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##### 



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




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##### 



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




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##### 



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




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##### 



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




---



##### 



Risks
    Related to Our Intellectual Property
  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.
        If we
    are unable to obtain and enforce patent protection for our drug
    candidates, our business could be materially
    harmed.
     23




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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, know-how and trade secrets.
  ® ®
   24




---



##### 



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.
      
    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.     25




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##### 



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




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##### 



We or
    our future collaborators may not obtain favorable reimbursement
    rates for our drug candidates.
    Our
    operations involve hazardous materials and medical waste and are
    subject to environmental, health and safety controls and
    regulations. Any claim relating to our improper handing, storage
    or disposal of biological and hazardous materials could be
    time-consuming and costly, and may exceed our
    resources.
   27




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##### 



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.
      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.
    
    our stockholder rights plan;
    provisions in our certificate of incorporation and
    bylaws; and
    Section 203 of the Delaware General Corporation Law.     28




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##### 




    the requirement that actions by our stockholders by written
    consent be unanimous;
    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    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
   29




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##### 



High


Low2007:First Quarter(January 1  March 31)

$
5.85


$
3.08Second Quarter(April 1  June 30)

$
6.38


$
4.25Third Quarter(July 1  September 30)

$
6.25


$
4.10Fourth Quarter(October 1  December 31)

$
5.75


$
2.90   High


Low2006:First Quarter(January 1  March 31)

$
5.99


$
3.80Second Quarter(April 1  June 30)

$
5.45


$
3.30Third Quarter(July 1  September 30)

$
3.98


$
2.20Fourth Quarter(October 1  December 31)

$
4.35


$
2.47     Stockholders
    Dividends
    Securities
    Authorized for Issuance under Equity Compensation
    Plans
  Form 10-K.
 30




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##### 



ITEM 6.
    SELECTED
    FINANCIAL DATA  Form 10-K.
  December 31,2007


2006


2005


2004


2003(In thousands, except share and per share data)SUMMARY STATEMENTS OF OPERATIONS:Revenue

$
809


$
2,724


$
1,544


$
1,900


$
100Operating expenses:Research and development


15,322



13,269



15,789



10,680



12,510General and administrative


8,240



7,661



5,066



4,325



4,567Total operating expenses


23,562



20,930



20,855



15,005



17,077Loss from operations


(22,753
)


(18,206
)


(19,311
)


(13,105
)


(16,977
)Other income (expense):Interest income


1,603



1,288



503



327



678Interest expense


(633
)


(808
)


(1,147
)


(890
)


(701
)Other


110



624



663



8



(75
)Other income (expense), net


1,080



1,104



19



(555
)


(98
)Net loss


(21,673
)


(17,102
)


(19,292
)


(13,660
)


(17,075
)Dividends on and accretion of convertible preferred stock










(1,111
)


(1,449
)


(1,449
)Net loss attributed to common shareholders

$
(21,673
)

$
(17,102
)

$
(20,403
)

$
(15,109
)

$
(18,524
)Net loss per share  basic and diluted

$
(1.42
)

$
(1.74
)

$
(9.58
)

$
(117.65
)

$
(146.29
)Weighted average number of shares of Common Stock outstanding


15,298,590



9,841,235



2,129,388



128,417



126,630   As of December 31,2007


2006


2005


2004


2003(In thousands)SUMMARY BALANCE SHEET DATA:Cash, cash equivalents and marketable securities(1)

$
28,524


$
20,430


$
27,748


$
14,309


$
27,720Working capital


18,384



8,629



17,070



5,545



15,300Total assets


37,305



31,391



41,282



29,292



46,055Total debt


7,211



8,725



10,944



13,631



16,234Accumulated deficit


(124,377
)


(102,704
)


(85,602
)


(65,949
)


(51,454
)Total stockholders equity


26,175



17,874



25,883



(65,971
)


(51,435
)     (1)
    
    Includes restricted cash of $5.3 million,
    $6.0 million, $6.3 million, $6.1 million and
    $6.7 million at December 31, 2007, 2006, 2005, 2004
    and 2003 respectively. 31




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##### 



ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Overview
  first-in-class ®
  ®
    Financial
    Operations Overview
  Revenue
    Collaboration Revenue. and/or
  Research
    and Development Expense
    β-catenin
 32




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##### 



General
    and Administrative
    Quarterly
    Results May Fluctuate
    
    the timing and extent of our development activities and clinical
    trials for AVN944 and any other biopharmaceutical drug
    candidates that we may develop in the future;
    the timing and outcome of our applications for regulatory
    approval for our drug candidates;
    the timing and extent of our adding new employees and
    infrastructure; and
    the timing of any milestone payments, license fees, or royalty
    payments that we may be required to make or that we would
    receive from collaborations.  Critical
    Accounting Policies and Significant Judgments and
    Estimates
    Form 10-K.
  Revenue
    Recognition
   33




---



##### 



Accrued
    Expenses
    Stock-Based
    Compensation
  Share-Based Payment. Accounting for
    Stock Issued to Employees
         34




---



##### 



Results
    of Operations
  Year
    Ended December 31, 2007 Compared to Year Ended
    December 31, 2006
  Revenue.
  Research and Development.
    General and Administrative.
  Interest Income.
  Interest Expense.
  Other Income.
  Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Revenue.
  Research and Development.
 35




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##### 



General and Administrative.
  Interest Income.
  Interest Expense.
  Other Income.
  Liquidity
    and Capital Resources
  Overview
    
    fund our research, development and clinical programs;
    obtain regulatory approvals;
    prosecute, defend and enforce any patent claims and other
    intellectual property rights;
    fund general corporate overhead; and
    support our debt service requirements and contractual
    obligations.          Sources
    and Uses of Cash
  Operating Activities.
 36




---



##### 



Investing Activities.
  Financing Activities.
  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;
    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. 37




---



##### 



Contractual
    Obligations
    Payment Due by PeriodLess Than


1-3


4-5


More ThanContractual Obligations

Total


1 Year


Years


Years


5 YearsLong-term debt(1)

$
15,294


$
2,873


$
8,180


$
4,240


$
Operating lease obligations(2)


3,997



740



2,355



903



Cooperative research and development agreements(3)


40



40











Total(4)

$
19,331


$
3,653


$
10,535


$
5,143


$
     (1)
    
    Includes principal, interest and letter of credit fee payments
    on our development bond financing and principal and interest
    payments on our equipment financing. Our development bond
    financing carries a variable interest rate. Amounts presented in
    the table assume a fixed rate of 4.95% that was in effect on
    December 31, 2007. 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,
    2007 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
    and II clinical trials 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.  Recent
    Accounting Pronouncements
   38




---



##### 



instrument-by-instrument
  EITF 07-03, (EITF 07-3). EITF 07-3 EITF 07-3 EITF 07-3
  Off-Balance
    Sheet Arrangements
    Subsequent
    Events
    ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK       39




---



##### 



Cash and cash equivalents

$
6.3 millionShort-term investments

$
15.5 millionLong-term investments

$
1.4 millionRestricted cash and marketable securities

$
5.3 million      40




---



##### 



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




---



##### 



Avalon
    Pharmaceuticals, Inc.
  Balance
    Sheets
  December 31,2007


2006(In thousands, except share and per share data)ASSETSCurrent assets:Cash and cash equivalents

$
6,276


$
3,099Short-term marketable securities


15,558



9,528Accounts receivable


200



724Interest receivable


190



175Prepaid expenses


743



642Deposits


102



102Total current assets


23,069



14,270Restricted cash and marketable securities


5,275



5,972Property and equipment, net


7,325



8,923Long-term marketable securities


1,416



1,831Deposits






105Deferred financing costs


220



290Total assets

$
37,305


$
31,391LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,063


$
1,857Accrued expenses and other current liabilities


1,207



1,232Deferred revenue and customer advances


1,204



1,034Current portion of long-term debt


1,211



1,518Total current liabilities


4,685



5,641Deferred rent


446



469Long-term deferred revenue, net of current portion






200Long-term debt, net of current portion


6,000



7,207Stockholders equity:Series C Junior Participating Preferred stock,
    $0.01 par value; 300,000 shares authorized; no shares
    issued and outstanding






Common stock, $0.01 par value; 60,000,000 shares
    authorized; 17,026,462 and 10,137,340 shares issued and
    outstanding at December 31, 2007 and 2006, respectively


170



101Additional capital


150,331



120,477Other comprehensive income


50



Accumulated deficit


(124,377
)


(102,704
)Total stockholders equity


26,174



17,874Total liabilities and stockholders equity

$
37,305


$
31,391    42




---



##### 



Avalon
    Pharmaceuticals, Inc.
  Statements
    of Operations
  Year Ended December 31,2007


2006


2005(In thousands, except share and per share data)Revenues

$
809


$
2,724


$
1,544Costs and expenses:Research and development


15,322



13,269



15,789General and administrative


8,240



7,661



5,066Total costs and expenses


23,562



20,930



20,855Loss from operations


(22,753
)


(18,206
)


(19,311
)Other income (expense):Interest income


1,603



1,288



503Interest expense


(633
)


(808
)


(1,147
)Other


110



624



663Total other income:


1,080



1,104



19Net Loss


(21,673
)


(17,102
)


(19,292
)Accretion of redeemable convertible preferred stock










(1,111
)Net loss attributed to common stockholders

$
(21,673
)

$
(17,102
)

$
(20,403
)Net loss attributed to common stockholders per common
    share  basic and diluted

$
(1.42
)

$
(1.74
)

$
(9.58
)Weighted average number of common shares  basic and
    diluted


15,298,590



9,841,235



2,129,388    43




---



##### 





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











Additional


Deferred


Other





TotalSeries A


Series B


Bridge


Common Stock


Paid-in


Stock


Comprehensive


Accumulated


StockholdersShares


Amount


Shares


Amount


Financing


Shares


Amount


Capital


Compensation


Income


Deficit


Equity (Deficit)(In thousands, except share amounts)Balance at December 31, 2004


5,577,500



11,155



20,126,997



68,343







128,690



1



9







(32
)


(65,949
)


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






















3,521



0



9















9Deferred stock compensation






























379



(379
)






Amortization of deferred stock compensation


































129











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


















5,294



























5,294Amortization of Series B offering costs














656















(295
)










(361
)


(656
)Amortization of Series B purchase stock warrant














456































456Conversion of Series B stock warrants to common stock
    warrants






























656















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


(1,000,000
)


(2,000
)


(1,190,611
)


(4,109
)






273,826



3



6,106















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


(4,577,500
)


(9,155
)


(18,936,386
)


(65,346
)


(5,294
)


5,251,339



53



79,742















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






















2,750,000



28



25,072















25,100Net loss










































(19,292
)


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






































6







6Net comprehensive loss














































(19,286
)Balance at December 31, 2005





$







$
0


$
0



8,407,376


$
84


$
111,677


$
(250
)

$
(26
)

$
(85,602
)

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






















35,152



0



93















93Issuance of common stock to board of directors as compensation






















28,146



0



103















104Issuance of common stock, net of offering costs






















1,666,666



17



7,180















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






























1,674















1,674Deferred stock compensation






























(250
)


250











Net loss










































(17,102
)


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






































26







26Net comprehensive loss














































(17,076
)Balance at December 31, 2006





$







$
0


$
0



10,137,340


$
101


$
120,477


$
0


$
(0
)

$
(102,704
)

$
17,874Issuance of common stock to employee upon exercise of stock
    options






















27,140



0



80















80Issuance of common stock to board of directors as compensation






















23,210



0



103















103Issuance of common stock, net of offering costs






















6,838,772



68



28,178















28,247Expense fair value of options per FAS 123R






























1,493















1,493Net loss










































(21,673
)


(21,673
)Net unrealized gain on available for sale securities






































50







50Net comprehensive loss














































(21,623
)Balance at December 31, 2007





$







$



$




17,026,462


$
170


$
150,332


$
0


$
50


$
(124,377
)

$
26,174    44




---



##### 





Avalon
    Pharmaceuticals, Inc.
  Statements
    of Cash Flows
  Year Ended December 31,2007


2006


2005(In thousands)Operating activitiesNet loss

$
(21,673
)

$
(17,102
)

$
(19,292
)Adjustments to reconcile net loss to net cash used in operating
    activities:Depreciation


2,025



2,425



2,644Non cash interest expense


217



282



623Compensation expense related to stock and stock options


1,493



1,778



129Amortization of premium on investments


(709
)


(37
)


148Changes in operating assets and liabilities:Accounts receivable


509



196



(475
)Prepaid expenses and other assets


4



190



(580
)Accounts payable


(794
)


758



719Accrued liabilities


(25
)


266



766Deferred revenue


(30
)


(689
)


1,923Deferred rent


(23
)


1



22Net cash used in operating activities


(19,006
)


(11,932
)


(13,373
)Investing activitiesPurchases of marketable securities


(43,406
)


(19,974
)


(24,771
)Proceeds from sale of marketable securities


39,247



20,723



18,671Purchases of property and equipment


(427
)


(351
)


(243
)Net cash provided by (used in) investing activities


(4,586
)


398



(6,343
)Financing activitiesPrincipal payments on debt, line of credit


(314
)


(1,018
)


(1,487
)Proceeds from issuance of common stock, net


28,430



7,290



25,109Principal payments on bond payable


(1,200
)


(1,200
)


(1,200
)Deferred financing costs


(148
)


(171
)


(251
)Proceeds from issuance convertible notes










5,026Net cash provided by financing activities


26,768



4,901



27,197Net increase (decrease) in cash and cash equivalents


3,176



(6,633
)


7,481Cash and cash equivalents at beginning of year


3,099



9,732



2,251Cash and cash equivalents at end of year

$
6,276


$
3,099


$
9,732Supplemental informationCash paid for interest

$
415


$
515


$
520    45




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS
  1.
    Organization  ®
    2.
    Liquity
    Risks and Managements Plans          3.
    Summary
    of Significant Accounting Policies  Use of
    Estimates
    Cash
    and Cash Equivalents
   46




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Marketable
    Securities
    Property
    and Equipment
      December 31,2007


2006Scientific equipment

$
7,115


$
6,730Computer equipment


1,379



1,338Leasehold improvements


12,093



12,093Furniture and fixtures


463



46321,050



20,624Less accumulated depreciation


13,725



11,701Property and equipment, net

$
7,325


$
8,923     Deferred
    Financing Costs
    Revenue
    Recognition
   47




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Research
    and Development Costs
    Income
    Taxes
    Restricted
    Cash and Investments
    Stock-Based
    Compensation
     48




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Year Ended December 31,2007


2006


2005(In thousands)Actual net loss attributable to common stockholders:As reported

$
(21,673
)

$
(17,102
)

$
(20,403
)Add: Stock compensation included in reported net loss
    attributable to common stockholders










129Deduct: Total stock-based employee compensation expense
    determined under fair value-based method for all awards










(681
)Pro forma net loss attributable to common stockholders


(21,673
)


(17,102
)


(20,955
)Net loss attributable to common stockholders per common share:Basic and diluted  as reported

$
(1.42
)

$
(1.74
)

$
(9.58
)Basic and diluted  pro forma

$
(1.42
)

$
(1.74
)

$
(9.84
)Weighted average number of common shares  basic and
    diluted


15,298,590



9,841,235



2,129,388   Accounting
    for Stock-Based Compensation
  Basic
    and Diluted Net Loss Attributable to Common Stockholders Per
    Common Share
    Comprehensive
    Loss
  Reporting Comprehensive Income
  Fair
    Value of Financial Instruments and Concentration of Credit
    Risk
   49




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Segment
    Information
  Disclosure about Segments of an
    Enterprise and Related Information.
  Reclassification
    Recently
    Issued Accounting Pronouncements
    instrument-by-instrument
  EITF 07-03, (EITF 07-03). EITF 07-03 EITF 07-03 EITF 07-03
 50




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  4.
    Marketable
    Investments    2007


2006Amortized


Gains





Amortized


GainsAvailable for Sale

Cost


(Losses)


Fair Value


Cost


(Losses)


Fair ValueInvestmentsU.S. Treasury and agencies

$
202


$
5


$
207


$
204


$



$
204Corporate debt securities


16,722



45



16,767



11,155







11,15516,924



50



16,974



11,359







11,359Restricted investmentsCash and cash equivalents


1,506







1,506



1,447







1,447U.S. Treasury and agencies


3,769







3,769



4,525







4,525Corporate debt securities






















5,275







5,275



5,972







5,972$
22,199


$
50


$
22,249


$
17,331


$



$
17,331     2007


2006Maturity

Amortized Cost


Fair Value


Amortized Cost


Fair ValueLess than one year

$
20,790


$
20,833


$
15,500


$
15,500Due in one to two years


1,409



1,416



1,831



1,831Total

$
22,199


$
22,249


$
17,331


$
17,331   5.
    Debt    December 31,2007


2006Maryland Industrial Development Financing Authority Taxable
    Variable Rate Demand Revenue Bond

$
7,200


$
8,400Equipment financing


11



3297,211



8,729Less current portion


(1,211
)


(1,518
)Less discount related to warrants






(4
)Long-term debt

$
6,000


$
7,207   Maryland
    Industrial Development Financing Authority (MIDFA) Taxable
    Variable Rate Demand Revenue Bond
   51




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
          Equipment
    Financing
  36-month
       52




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      2008

$
1,2112009


1,2002010


1,2002011


1,2002012


1,200Thereafter


1,200$
7,211   6.
    Redeemable
    Convertible Preferred Stock  Series A
    Redeemable Convertible Preferred Stock
        Series B
    Redeemable Convertible Preferred Stock
         53




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    7.
    Rights
    Plan             54




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  8.
    Stockholders
    Equity (Deficit)  Reverse
    Stock Split
  1-for-5 1-for-1.6
  Common
    Stock
           55




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        Stock
    Options
            December 31,2007


2006(In millions)Research and development

$
0.2


$
0.5General and administrative


1.3



1.2Total stock  based compensation expense

$
1.5


$
1.7  56




---



##### 



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

AverageAverage

Remaining

AggregateExercise

Contractual

IntrinsicShares

Price

Term

Value(In thousands)Balance at December 31, 2006


1,989,474



4.11Granted


191,955



4.53Exercised


(27,140
)


2.96Cancelled or expired


(71,619
)


5.45Balance at December 31, 2007


2,082,670



4.12Outstanding at December 31, 2007


2,082,670


$
4.12



7.4960


$
335Vested and expected to vest at December 31, 2007


1,995,198


$
4.12



7.4960


$
335Exercisable at December 31, 2007


1,495,341


$
4.24



6.9930


$
220     2007

2006

2005Option pricing model


Black-Scholes



Black-Scholes



Black-ScholesExpected stock price volatility


69.81
%


69.26
%


66.2
%Expected dividend yield


0
%


0
%


0
%Risk-free interest rate


4.95
%


4.60
%


4.00
%Expected life of option (years)


6.0



6.0



4.7   Expected Stock Price Volatility
  Dividend Yield
  Risk-Free Interest Rate 
  Expected Life of the Option Term
   57




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
          Stock
    Warrants
        9.
    Income
    Taxes    58




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  December 31,2007


2006(In thousands)Deferred tax assets:Net operating loss carryforwards

$
36,246


$
27,051Capitalized research and development expenses


7,383



7,135Start-up
    costs


1,096



2,146Deferred revenue


365



399Deferred rent expense


177



181Accrued payroll


101



119Depreciation


1,140



738R&D credit


2,382



1,616Stock options






389Other


805



31Deferred tax liabilities:Depreciation






Valuation allowance


(49,695
)


(39,805
)Net deferred tax assets

$



$
         2007


2006


2005Federal tax at statutory rates

$
(7,369
)

$
(5,815
)

$
(6,559
)State taxes, net of federal benefit


(970
)


(758
)


(876
)Change in valuation allowance


8,111



6,339



7,322Permanent differences


228



234



113Provision for income taxes

$



$



$
  59




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  10.
    Related
    Party Transactions    11.
    Commitments
    and Contingencies  10-year
    Operating2008

$
7402009


7622010


7852011


8082012


832Thereafter


70Total

$
3,997   Form S-3 30-day
  12.
    Collaborations
    and Licenses   60




---



##### 



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




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      ® tm
    ®
     62




---



##### 



AVALON
    PHARMACEUTICALS, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  13.
    Employee
    Benefit Plan    14.
    Quarterly
    Financial Information (Unaudited)  Quarter EndedMarch 31

June 30

September 30

December 31(In thousands, except per share data)2007 Summary statement of operations:Total revenues

$
731


$
78


$



$
Loss from operations


(5,608
)


(6,031
)


(5,728
)


(5,386
)Net loss attributable to Common Stockholders


(5,345
)


(5,809
)


(5,405
)


(5,114
)Net loss attributable to CommonStockholders per common share  basic and diluted


(0.43
)


(0.40
)


(0.32
)


(0.30
)2006 Summary statement of operations:Total revenues

$
539


$
417


$
1,115


$
653Loss from operations


(4,863
)


(4,716
)


(3,992
)


(4,635
)Net loss attributable to Common Stockholders


(4,558
)


(4,429
)


(3,723
)


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


(0.51
)


(0.44
)


(0.37
)


(0.43
)   15.
    Subsequent
    Event   63




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##### 



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Conclusion
    Regarding the Effectiveness of 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)
  Managements
    Report on Internal Control Over Financial Reporting
  rule 13a-15(f) Internal Control 
    Integrated Framework
  Internal
    Control  Integrated Framework
  Form 10-K Form 10-K.
  ITEM 9B.
    OTHER
    INFORMATION   PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE   64




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##### 



http://www.avalonrx.com Form 8-K
      ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS      ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   65




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##### 



PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES           66




---



##### 



SIGNATURES
    AVALON PHARMACEUTICALS, INC
  By:
    /s/  Kenneth
    C. Carter, Ph.D.       POWER OF
    ATTORNEY
      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, 2008/s/  C.
    Eric WinzerC.
    Eric Winzer

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

March 31, 2008/s/  Glen
    A. FarmerGlen
    A. Farmer

Controller(Principal Accounting Officer)

March 31, 2008/s/  Bradley
    G. LorimierBradley
    G. Lorimier

Chairman of the Board of Directors

March 31, 2008Philip
    Frost, M.D., Ph.D.

Director

March 31, 2008/s/  David
    S. Kabakoff, Ph.D.David
    S. Kabakoff, Ph.D.

Director

March 31, 2008 67




---



##### 



Signature

Title

Date/s/  Michael
    R. Kurman, M.D.Michael
    R. Kurman

Director

March 31, 2008/s/  Ivor
    Royston, M.D.Ivor
    Royston, M.D.

Director

March 31, 2008/s/  William
    A. Scott, Ph.D.William
    A. Scott, Ph.D.

Director

March 31, 2008/s/  William
    H. WasheckaWilliam
    H. Washecka

Director

March 31, 2008  68




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##### 



INDEX TO
    EXHIBITS
  ExhibitNumber

Exhibit Title3.1A(1)

Amended and Restated Certificate of Incorporation of Avalon
    Pharmaceuticals, Inc., as amended3.1B(10)

Certificate of Designation, Preferences and Rights of Series C
    Junior Participating Preferred Stock3.1C(10)

Certificate of Elimination of Series A Convertible Preferred
    Stock and Series B Convertible Preferred Stock3.2(1)

Amended and Restated Bylaws4.1(1)

Specimen Common Stock Certificate4.2(10)

Rights Agreement, dated as of April 26, 2007, between the
    Company and American Stock Transfer & Trust Company, as
    Rights Agent10.1*(1)

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

Collaboration Agreement, effective as of October 15, 2003,
    between Avalon Pharmaceuticals, Inc. and Medarex, Inc. on behalf
    of itself and its wholly-owned subsidiary, GenPharm
    International, Inc.10.3*(1)

Collaboration and License Agreement, dated June 17, 2005,
    between Avalon Pharmaceuticals, Inc. and MedImmune, Inc.10.4*(1)

Pilot Study Agreement, dated September 9, 2005, between Avalon
    Pharmaceuticals, Inc. and Novartis Institutes for Biomedical
    Research, Inc.10.5A*(8)

Collaboration Agreement between Avalon Pharmaceuticals, Inc. and
    ChemDiv, Inc., dated July 25, 200610.5B*(8)

First Amendment, dated September 21, 2006, to Collaboration
    Agreement between Avalon Pharmaceuticals, Inc. and ChemDiv, Inc.10.6*(12)

Exclusive License and Research Collaboration Agreement, dated
    March 5, 2007 by and between Merck & Co., Inc., and
    Avalon Pharmaceuticals, Inc.10.7A(1)

Amended and Restated Employment Agreement, dated April 21, 2005
    by and between Avalon Pharmaceuticals, Inc. and Kenneth C.
    Carter, Ph.D.10.7B(9)

Amendment No. 1, dated December 26, 2006, to Amended and
    Restated Employment Agreement, dated April 21, 2005 by and
    between Avalon Pharmaceuticals, Inc. and Kenneth C.
    Carter, Ph.D.10.8A(1)

Amended and Restated Employment Agreement, dated April 21, 2005
    by and between Avalon Pharmaceuticals, Inc. and Thomas G. David10.8B(9)

Amendment No. 1, dated December 26, 2006, to Amended and
    Restated Employment Agreement, dated April 21, 2005 by and
    between Avalon Pharmaceuticals, Inc. and Thomas G. David10.9A(1)

Amended and Restated Employment Agreement, dated April 21, 2005
    by and between Avalon Pharmaceuticals, Inc. and Gary Lessing10.9B(9)

Amendment No. 1, dated December 26, 2006, to Amended and
    Restated Employment Agreement, dated April 21, 2005 by and
    between Avalon Pharmaceuticals, Inc. and Gary Lessing10.10A(1)

Amended and Restated Employment Agreement, dated April 21, 2005
    by and between Avalon Pharmaceuticals, Inc. and David
    Bol, Ph.D.10.10B(9)

Amendment No. 1, dated December 26, 2006, Amended and Restated
    Employment Agreement, dated April 21, 2005 by and between Avalon
    Pharmaceuticals, Inc. and David Bol, Ph.D10.11(A)(6)

Employment letter between Avalon Pharmaceuticals, Inc. and J.
    Michael Hamilton, dated April 20, 2006.10.11(B)(9)

Amendment No. 1, dated December 26, 2006, to Employment
    Agreement between Avalon Pharmaceuticals, Inc. and J. Michael
    Hamilton, dated April  20, 2006




---



##### 



ExhibitNumber

Exhibit Title10.12(A)(7)

Employment letter between Avalon Pharmaceuticals, Inc. and David
    D. Muth, dated September 12, 2006.10.12(B)(9) 

Amendment No. 1, dated December 26, 2006, to Employment
    Agreement between Avalon Pharmaceuticals, Inc. and David D.
    Muth, dated September  12, 200610.13(11) 

Employment Letter, dated May 2, 2007, between Avalon
    Pharmaceuticals, Inc. and C. Eric Winzer10.14A(1)

Consulting Agreement, dated February 1, 2000, by and between
    Avalon Pharmaceuticals, Inc. and Bradley G. Lorimier10.14B(1)

Addendum to Consulting Agreement10.14C(1)

Second Addendum to Consulting Agreement, dated March 30, 200310.14D(1)

Third Addendum to Consulting Agreement, dated October 25, 200410.14E

Fourth Addendum to Consulting Agreement, dated January 6, 2006
    (filed herewith)10.14F

Fifth Addendum to Consulting Agreement, dated January 5, 2007
    (filed herewith)10.14G

Sixth Addendum to Consulting Agreement, dated August 1, 2007
    (filed herewith)10.15(1)

Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
    Plan, as of October 15, 2001, as amended10.16(1)

Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
    Plan  Form of Non-qualified Stock Option
    Agreement  $.20 per share10.17(1)

Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
    Plan  Form of Non-qualified Stock Option
    Agreement  $.40 per share10.18(1)

Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
    Plan  Form of Incentive Stock Option
    Agreement  $.20 per share10.19(1)

Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
    Plan  Form of Incentive Stock Option
    Agreement  $.40 per share10.20A(1)

Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
    Plan  First Amendment to Form of Incentive Stock
    Option Agreement10.20B(1)

Avalon Pharmaceuticals, Inc. Amended and Restated 1999 Stock
    Plan  Second Amendment to Form of Incentive Stock
    Option Agreement10.21(14)

Avalon Pharmaceuticals, Inc. 2005 Omnibus Long-Term Incentive
    Plan, as amended10.22(2)

Avalon Pharmaceuticals, Inc. 2005 Omnibus Long-Term Incentive
    Plan  Form of Incentive Stock Option Agreement10.23(2)

Avalon Pharmaceuticals, Inc. 2005 Omnibus Long-Term Incentive
    Plan  Form of Nonqualified Stock Option Agreement10.24(9)

Stock Option Agreement Amendment, dated December 26, 2006,
    between Avalon Pharmaceuticals, Inc. and Gary Lessing10.25(11)

Letter Agreement, dated May 2, 2007, between Avalon
    Pharmaceuticals, Inc. and Gary Lessing10.26(3)

Stock Election Policy for Non-Employee Director Fees10.27(1)

Form of Avalon Pharmaceuticals, Inc. Director and Officer
    Indemnification Agreement10.28(13)

Purchase Agreement, dated May 24, 200710.29(13)

Registration Rights Agreement, dated May 24, 200710.30(13)

Form of Common Stock Purchase Warrant, dated May 25, 200710.31(12)

Purchase Agreement, dated January 19, 200710.32(12)

Registration Rights Agreement, dated January 19, 200710.33*(4)

Purchase Agreement, dated February 27, 200610.34(4)

Registration Rights Agreement, dated February 27, 200610.35(1)

Registration Rights Agreement, dated October 26, 2001, by and
    between Avalon Pharmaceuticals, Inc. and the Investors listed on
    Schedule I thereto




---



##### 



ExhibitNumber

Exhibit Title10.36(1)

Common Stock Warrant Agreement, dated August 11, 2000, by and
    between Avalon Pharmaceuticals, Inc. and Alexandria Real Estate
    Equities, L.P.10.37(1)

Common Stock Warrant Agreement, dated March 23, 2001, by and
    between Avalon Pharmaceuticals, Inc. and Compugen, Ltd.10.38(1)

Series B Convertible Preferred Stock Warrant, dated February 6,
    2002, granted to Array Capital LLC10.39A(1)

Series B Convertible Preferred Stock Warrant, dated May 14,
    2001, granted to GATX Ventures, Inc.10.39B(1)

Letter Amendment to Series B Convertible Preferred Stock
    Warrant, dated October 11, 2001, by and between Avalon
    Pharmaceuticals, Inc. and GATX Ventures, Inc.10.40(1)

Series B Convertible Preferred Stock Warrant Agreement, dated
    August  20, 2002, by and between Avalon Pharmaceuticals, Inc.
    and General Electric Capital Corporation10.41(1)

Series B Convertible Preferred Stock Warrant Agreement, dated
    December  23, 2002, by and between Avalon Pharmaceuticals, Inc.
    and General Electric Capital Corporation10.42(1)

Series B Convertible Preferred Stock Warrant Agreement, dated
    June 18, 2003, by and between Avalon Pharmaceuticals, Inc. and
    General Electric Capital Corporation10.43(1)

Series B Convertible Preferred Stock Warrant Agreement, dated
    December  23, 2003, by and between Avalon Pharmaceuticals, Inc.
    and General Electric Capital Corporation10.44A(1)

Master Security Agreement, dated as of June 25, 2002, by and
    between General Electric Capital Corporation and Avalon
    Pharmaceuticals, Inc.10.44B(1)

Amendment to Master Security Agreement dated as of June 25, 200210.45(1)

Lease Agreement, dated July 15, 2002, by and between Westphalia
    Center II Limited Partnership and Avalon Pharmaceuticals,
    Inc.10.46(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)10.47(1)

Loan Agreement, dated April 1, 2003, by and between Maryland
    Industrial Development Financing Authority and Avalon
    Pharmaceuticals, Inc.10.48A(1)

Letter of Credit Agreement, dated April 1, 2003, by and between
    Avalon Pharmaceuticals, Inc. and Manufacturers and Traders Trust
    Company10.48B(1)

Amendment to Irrevocable Letter of Credit, dated April 1, 200410.48C(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, 200510.48D(1)

Second Modification Agreement by and between Manufacturers and
    Traders Trust Company, Maryland Industrial Development Financing
    Authority and Avalon Pharmaceuticals, Inc., dated August 9, 200510.48E

Third Modification Agreement by and between Manufacturers and
    Traders Trust Company, Maryland Industrial Development Financing
    Authority and Avalon Pharmaceuticals, Inc., dated December 14,
    2006 (filed herewith)10.49(1)

Security Agreement, dated April 1, 2003, by and between Avalon
    Pharmaceuticals, Inc. and Manufacturers and Traders Trust Company10.50(1)

Collateral Pledge and Security Agreement and Control Agreement,
    dated April 1, 2003, by and between Avalon Pharmaceuticals, Inc.
    and Manufacturers, Traders Trust Company and Allfirst Trust
    Company National Association10.51(1)

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




---



##### 



ExhibitNumber

Exhibit Title10.52(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
    Company10.53(1)

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

List of Subsidiaries (filed herewith)23.1

Consent of Ernst & Young LLP (filed herewith)31.1

Certification of Chief Executive Officer pursuant to Rule
    13a-14(a) under the Securities Exchange Act of 1934 as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
    herewith)31.2

Certification of Chief Financial Officer pursuant to Rule
    13a-14(a) under the Securities Exchange Act of 1934 as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
    herewith)32.1

Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350 as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
    herewith)     *
    
    Confidential treatment has been granted for portions of this
    exhibit. These confidential portions have been omitted and were
    filed separately with the SEC.
    
    Denotes management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to our Registration Statement on
    Form S-1
    (File
    No. 333-124565).(2)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on November 1, 2005.(3)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on December 5, 2006.(4)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on March 3, 2006.(5)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on June 13, 2006.(6)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on August 2, 2006.(7)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on September 27, 2006.(8)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed on November 8, 2006.(9)
    
    Incorporated by reference to our Annual Report on
    Form 10-K
    filed on March 30, 2007.(10)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on April 30, 2007.(11)
    
    Incorporated by reference to our Current Report on
    Form 8-K
    filed on May 4, 2007.(12)
    
    Incorporated by reference to our Quarterly Report on
    Form 10-Q
    filed on May 14, 2007.(13)
    
    Incorporated by reference to our Current Report on
    form 8-K
    filed on May 29, 2007.(14)
    
    Incorporated by reference to our Current Report on
    form 8-K
    filed on June 7, 2007.