Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement. In April 2003, Avalon entered into a series of agreements with the Maryland Industrial Development Financing Authority ("MIDFA") and Manufacturers and Traders Trust Company ("M&T Bank") in order to finance improvements to Avalon's corporate office and research facility located in Germantown, Maryland. MIDFA sold development bonds in the amount of $12.0 million (the "Bonds"). The proceeds of the sale of the Bonds were put in trust to reimburse Avalon for costs incurred for improvements to the facility. Avalon is required to repay the trust $1.2 million annually, on the first day of April, for these borrowings. The borrowing bears interest at a variable rate and matures on April 8, 2013. The weighted-average interest rate during the six months ended June 30, 2008 was 3.09%.
In connection with the development bond financing, Avalon entered into an agreement with M&T Bank dated April 1, 2003 (the "Letter of Credit Agreement") to issue an irrevocable letter of credit to the trustee for the Bonds to provide payment of the principal and interest of the Bonds. The amount of the letter of credit changes annually, as principal payments are made. As of June 30, 2008, that amount was $6,098,630, consisting of $6.0 million of principal and $98,630 in interest, computed at 50 days at an assumed maximum rate of interest of 12% per annum. The letter of credit expires the earlier of April 8, 2013, or the date the Bonds have been paid in full. In consideration of the letter of credit, Avalon granted M&T Bank a security interest in certain facility improvements, equipment and cash collateral held as restricted cash.
As described in Item 1.01 above, on October 27, 2008, Avalon entered into the Merger Agreement with Clinical Data pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into Avalon, with Avalon continuing as the surviving corporation and a subsidiary of Clinical Data. On October 29, 2008, Avalon received a letter (the "Letter") from M&T Bank providing Avalon with notice of an event of default under and a reservation of certain rights with respect to the Letter of Credit Agreement.
The Letter states that the Company's entry into the Merger Agreement and related transactions described in Item 1.01 above constitute events of default under
Section 11.1(f), 11.1(i), 11.1(j), 13.1(e), 13.1(g) and 13.1(q) of the Letter of Credit Agreement. These sections relate to a change in the control of Avalon and the creation of encumbrances on, or the disposition of, Avalon's assets. The Letter informs Avalon that, as a result of the events of default, M&T Bank has declared all outstanding amounts under the Letter of Credit Agreement, together with all other moneys payable to M&T Bank under the Letter of Credit Agreement, to be immediately due and payable to M&T Bank.
Under the Letter of Credit Agreement, if Avalon were unable to pay the amounts due, M&T Bank would have the right, among other things, to demand that MIDFA exercise its remedies under the indenture for the Bonds and accelerate the maturity of the Bonds, and to immediately draw under the Letter of Credit Agreement all funds necessary to pay amounts owning to M&T Bank as well as certain of M&T Bank's administrative expenses. In addition, M&T Bank could take possession and dispose of the collateral that secures Avalon's obligations under the Letter of Credit Agreement.
Following receipt of the Letter, on October 30, 2008 Avalon made a payment of $6,062,489.58 to M&T Bank which constituted all amounts due and owing under the Letter of Credit Agreement and included $6,000,000 of repayment of principal, $34,508.21 of accrued interest, and $27,981.37 for certain administrative fees and expenses. As a result of this payment, Avalon has no continuing obligations under the Letter of Credit Agreement.

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Item 3.02 Unregistered Sales of Equity Securities.
The information set forth under Item 1.01 is incorporated herein by reference. The 3,390,547 shares of Avalon common stock and the warrant for up to 1,695,273 shares of Avalon's common stock issued to Clinical Data in the private placement were issued in reliance on Section 4(2) under the Securities Act and Regulation D promulgated thereunder in a transaction not involving a public offering. Similarly, the shares of common stock issuable upon exercise of the warrants, when and if exercised, will be issued in reliance on Section 4(2) under the Securities Act and Regulation D promulgated thereunder in a transaction not involving a public offering.
Item 3.03. Material Modification to Rights of Security Holders.
As described above, Avalon and American Stock Transfer & Trust Company entered into the Rights Agreement Amendment to the Rights Agreement. The material terms of this transaction are described in Item 1.01 above and are incorporated herein by reference.
Section 9 - Financial Statements and Exhibits Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
2.1 Agreement and Plan of Merger and Reorganization dated as of October 27, 2008, by and among Avalon Pharmaceuticals, Inc., Clinical Data, Inc. and API Acquisition Sub II, LLC.*

2.2 Form of Contingent Value Rights Agreement by and between Clinical Data, Inc. and American Stock Transfer and Trust Co.

4.1 Amendment No. 1 to Rights Agreement dated as of October 27, 2008, between Avalon Pharmaceuticals, Inc. and American Stock Transfer & Trust Company.

10.1 Securities Purchase Agreement dated as of October 27, 2008, by and between Avalon Pharmaceuticals, Inc. and Clinical Data, Inc.

10.2 Common Stock Purchase Warrant dated October 27, 2008.

10.3 Registration Rights Agreement dated as of October 27, 2008, by and between Avalon Pharmaceuticals, Inc. and Clinical Data, Inc.

10.4 AvalonRx® License Agreement dated as of October 27, 2008, by and between Avalon Pharmaceuticals, Inc. and Clinical Data, Inc.

10.5 Note Purchase Agreement dated as of October 27, 2008, by and between Avalon Pharmaceuticals, Inc. and Clinical Data, Inc.

10.6 Form of Term Note.

10.7 Intellectual Property Security Agreement dated as of October 27, 2008, by and between Avalon Pharmaceuticals, Inc. and Clinical Data, Inc.

* The Company has omitted certain schedules in accordance with Regulation S-K
601(b)(2). The Company will furnish the omitted schedules to the Commission upon request.

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