Avellone is a descendant of Sicilian immigrants. He attended College of William & Mary in Virginia and completed with a Bachelors in English. During that time, he wrote short stories and scripts for role-playing games, some of which were published in the D&D magazine Dragon.
Through Bruce Harlick, then editor with Hero Games, he received the chance to write a book for the role-playing game Dark Champions. After several publications with Hero Games, he decided that game design was a career option. Steve Peterson, one of the founders of Hero Games, provided him an interview with Interplay Entertainment, a large game publisher at the time. His knowledge of role-playing games and his ideas impressed Interplay, and he was offered a position as a game designer.
During this time, Interplay’s financial situation worsened considerably. The development cycles for games became ever shorter. His coworkers began leaving for better opportunities. Nevertheless, Avellone remained with Black Isle, since he enjoyed developing role-playing games, and the prospect of a sequel for Baldur's Gate still existed.
At the time, he supported other game studios with his role-playing games expertise as well. He helped Reflexive Entertainment with dialog and character development during the early development of Lionheart. He participated in the story development and writing of Champions of Norrath with Snowblind Studios.
When Interplay decided to stop development on The Black Hound in 2003 (known then as Baldur's Gate III, for legal reasons), many Black Isle Studios members were shocked. Avellone had lost all confidence in the corporate management. By then, Brian Fargo had left the company. Avellone feared that Fallout 3 would reach the same fate as Baldur's Gate III and started to promote it in the Fallout community with publications such as the Fallout Bible.
When Feargus Urquhart submitted his notice of resignation, the atmosphere inside Black Isle changed drastically. Avellone decided to leave the game studio after working there for almost eight years. He quit, despite having spent three to four years with the pre-production of Fallout 3. Together with Feargus Urquhart, Darren Monahan, Chris Parker, and Chris Jones, he formed the game studio Obsidian Entertainment.