<PAGE>

================================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                              ___________________

                                   FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the quarterly period ended March 31, 2001

                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                        Commission File Number: 0-23137

                              ___________________


                                AVENUE A, INC.
            (Exact name of registrant as specified in its charter)

                              ___________________

       Washington                                       91-1819567
(State of Incorporation)                 (I.R.S. Employer Identification Number)

                         506 Second Avenue, 9th Floor
                           Seattle, Washington 98104
                   (Address of principal executive offices)

                                (206) 816-8800
             (Registrant's telephone number, including area code)

                              ___________________

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes[X]    No

     The number of shares of the registrant's Common Stock outstanding as of
April 30, 2001 was 58,117,822.

================================================================================

                                       1
<PAGE>

                                AVENUE A, INC.

                                   FORM 10-Q

                     FOR THE QUARTER ENDED MARCH 31, 2001

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                         ----
<S>                                                                                                      <C>
                                     PART I.   FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements...................................................    3

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.........   10

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................   24

                                     PART II.   OTHER INFORMATION

Item 1.  Legal Proceedings.............................................................................   24

Item 2.  Changes in Securities and Use of Proceeds.....................................................   25

Item 6.  Exhibits and Reports on Form 8-K..............................................................   25
</TABLE>

                                       2
<PAGE>

                                AVENUE A, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                    (in thousands except per share amounts)

<TABLE>
<CAPTION>
                                                                              March 31,       December 31,
                                                                              ---------       ------------
                                                                                2001              2000
                                                                                ----              ----
                                                                             (unaudited)
<S>                                                                          <C>              <C>
                                      Assets
Current assets:
  Cash and cash equivalents...................................................   $ 44,888          $ 38,888
  Short-term investments......................................................     79,599            95,257
  Accounts receivable, net of allowance of $3,018 and $3,616 at March
   31, 2001 and December 31, 2000, respectively...............................     20,090            39,343
  Other receivables...........................................................      1,667             1,824
  Prepaid expenses and other current assets...................................        993               716
                                                                                 --------          --------
Total current assets..........................................................    147,237           176,028

Property and equipment, net...................................................     12,187            13,087
Intangible assets, net........................................................      3,016             3,519
Other assets..................................................................      5,409             5,671
                                                                                 --------          --------
Total assets..................................................................   $167,849          $198,305
                                                                                 ========          ========

                    Liabilities and Shareholders' Equity

Current liabilities:
  Accounts payable............................................................   $ 19,735          $ 42,449
  Accrued expenses............................................................      8,212             6,215
  Notes payable, current portion..............................................      2,000             2,000
  Deferred revenue............................................................        832             1,084
                                                                                 --------          --------
Total current liabilities.....................................................     30,779            51,748

Notes payable, less current portion...........................................      3,056             3,556
                                                                                 --------          --------
Total liabilities.............................................................     33,835            55,304
                                                                                 --------          --------

Shareholders' equity:
  Common stock, $0.01 par value; 200,000 shares authorized; 58,116 and
   58,139 shares issued and outstanding at March 31, 2001 and December
   31, 2000, respectively.....................................................        581               581
  Paid-in capital.............................................................    220,906           222,901
  Deferred stock compensation.................................................    (15,421)          (21,566)
  Subscription receivable.....................................................       (918)             (941)
  Accumulated deficit.........................................................    (71,669)          (58,189)
  Accumulated other comprehensive income......................................        535               215
                                                                                 --------          --------
Total shareholders' equity....................................................    134,014           143,001
                                                                                 --------          --------
Total liabilities and shareholders' equity....................................   $167,849          $198,305
                                                                                 ========          ========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       3
<PAGE>

                                AVENUE A, INC.
    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                    (in thousands except per share amounts)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                      Quarter Ended
                                                                                      -------------
                                                                                        March 31,
                                                                                        ---------
                                                                                   2001           2000
                                                                                 --------        -------
<S>                                                                              <C>             <C>
Revenue.....................................................................     $ 24,135        $46,774
Expenses:
  Cost of revenue...........................................................       18,454         38,515
  Client support............................................................        3,348          3,326
  Product development.......................................................        3,507          1,577
  Selling, general, and administrative......................................        6,949          6,017
  Depreciation and amortization of property and equipment...................        1,462            608
  Amortization of intangible assets.........................................          502            510
  Amortization of deferred stock compensation...............................        3,836          6,190
  Corporate restructuring charges...........................................        1,500              -
                                                                                 --------        -------
     Total expenses.........................................................       39,558         56,743
                                                                                 --------        -------
Loss from operations........................................................      (15,423)        (9,969)

Interest income, net........................................................        1,943            709
                                                                                 --------        -------

Net loss....................................................................     $(13,480)       $(9,260)
                                                                                 ========        =======

Basic and diluted net loss per share........................................       $(0.24)       $ (0.25)
                                                                                 ========        =======

Shares used in computing basic and diluted net loss per share...............       56,728         36,664
                                                                                 ========        =======

Comprehensive loss:
  Net loss..................................................................     $(13,480)       $(9,260)
  Items of comprehensive income (loss)......................................          535            (65)
                                                                                 --------        -------
     Comprehensive loss.....................................................     $(12,945)       $(9,325)
                                                                                 ========        =======
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       4
<PAGE>

                                AVENUE A, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                                                           Quarter Ended
                                                                                           -------------
                                                                                             March 31,
                                                                                             ---------
                                                                                          2001           2000
                                                                                        --------       --------
<S>                                                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss...........................................................................   $(13,480)      $ (9,260)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization...................................................      5,800          7,297
     Loss on disposal of fixed assets................................................         --             71
     Changes in assets and liabilities:
        Accounts receivable..........................................................     19,253         (8,132)
        Other receivables and other current assets...................................       (120)          (853)
        Other assets.................................................................        263           (242)
        Accounts payable.............................................................    (22,714)          (538)
        Accrued expenses.............................................................      1,997          2,178
        Deferred revenue.............................................................       (252)         1,283
                                                                                        --------       --------
     Net cash used in operating activities...........................................     (9,253)        (8,196)
                                                                                        --------       --------


CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment................................................       (562)        (5,752)
  Sales (purchases) of marketable securities, net....................................     15,978        (61,291)
                                                                                        --------       --------
     Net cash provided by (used in) investing activities.............................     15,416        (67,043)
                                                                                        --------       --------


CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment of notes payable...........................................................       (500)           (52)
  Proceeds from issuance of common stock and exercises of common stock
    options, net.....................................................................        337        137,880
                                                                                        --------       --------
     Net cash (used in) provided by financing activities.............................       (163)       137,828
                                                                                        --------       --------
Net increase in cash and cash equivalents............................................      6,000         62,589
Cash and cash equivalents, beginning of period.......................................     38,888         10,962
                                                                                        --------       --------
Cash and cash equivalents, end of period.............................................   $ 44,888       $ 73,551
                                                                                        ========       ========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       5
<PAGE>

                                AVENUE A, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                March 31, 2001
               (in thousands except share and per share amounts)
                                  (unaudited)

1.   Organization and Operations of the Company

     Avenue A, Inc. (the Company) and its subsidiaries, including Avenue A/NYC
LLC (formerly iballs LLC), provides technology-based Internet advertising
services to businesses. The Company uses Internet media planning and buying,
proprietary ad management technology, anonymous user profiling and data analysis
systems to help advertisers increase the effectiveness and return on investment
of their Internet advertising campaigns. The Company was founded on July 1, 1997
and incorporated on February 27, 1998 in Washington State. The Company's
headquarters are located in Seattle.

     In 2000, the Company commenced international operations and opened offices
in Europe.

     Effective January 1, 2001, the Company established two operating divisions:
Avenue A and Atlas DMT.  Avenue A provides clients with a service and technology
offering that includes web advertising, email services, strategic portal
relationships, affiliate programs, customer targeting, and analytical services.
Atlas DMT intends to provide the Atlas Digital Marketing Suite to traditional
and interactive agencies, as well as in-house media buyers.

     The Company is subject to a number of risks similar to other companies in a
comparable stage of development including the need for continued growth of the
Internet advertising market, reliance on key personnel, competition from other
companies with greater financial, technical and marketing resources, and the
risks relating to the ability to secure adequate financing.

2.   Summary of Significant Accounting Policies

     Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.

     These statements reflect all adjustments, consisting only of normal,
recurring adjustments that, in the opinion of the Company's management, are
necessary for a fair presentation of the results of operations for the periods
presented. Operating results for the quarter ended March 31, 2001 are not
necessarily indicative of the results that may be expected for any subsequent
quarter or for the year ending December 31, 2001. Certain information and
footnote disclosures normally included in financial statements prepared in
conformity with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC).

     These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's audited financial statements and the accompanying
notes for the years ended December 31, 2000, 1999, and 1998, as included in the
Company's Annual Report on Form 10-K filed with the SEC.

     Reclassifications:   Certain prior year amounts have been reclassified to
conform to the current year presentation.

                                       6
<PAGE>

                                AVENUE A, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                March 31, 2001
               (in thousands except share and per share amounts)
                                  (unaudited)

     Revenue Recognition:   The Company generates revenue by providing
technology-based Internet advertising services to businesses. The Company's core
services include media planning and buying, ad serving, campaign analysis,
optimization and data collection and aggregation. The Company also generates
revenue through the Strategic Partnership Program which manages longer term
exclusive or complex partnerships between the Company's clients and Web sites or
advertising networks; Consulting which develops and maintains an evolving suite
of proprietary analytical tools, fed by Avenue A data, that lend insight into
how customers and prospective customers are likely to behave in the future;
LifeCycle E-mail Service which delivers targeted emails to specific customer
segments; and the Customer Targeting Program which delivers tailored
advertisements to the browsers of users which have previously visited clients'
Web sites.

     The Company follows Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements." This pronouncement summarizes certain of the SEC staff's
views in applying generally accepted accounting principles to revenue
recognition and was effective for the quarter ended December 31, 2000. In
addition, the Company follows the final consensus reached by the Emerging Issues
Task Force (EITF) in July 2000 on EITF 99-19 "Reporting Revenue Gross as a
Principal versus Net as an Agent."

     In accordance with EITF 99-19, the majority of the Company's revenue is
recognized under the gross method, which consists of the gross value of the
Company's billings to the Company's clients, includes the price of the
advertising space that the Company purchases from Web sites to resell to its
clients.  To generate revenue under gross method contracts, the Company
purchases advertising space from publisher Web sites and sells the purchased
space to the Company's clients and is ultimately responsible for payment to Web
sites for the cost of space the Company purchases.  The Company also recognizes
revenue for certain contracts under the net method.  To generate revenue under
net method contracts, the Company buys advertising space from publisher Web
sites on behalf of its clients and earns fees based on the dollar amount of
advertising space the Company purchases.  Under net method contracts, the
Company's client that is party to the contract is ultimately responsible for
payment to the publisher Web sites for the cost of the advertising space
purchased.  All such revenue is recognized over the period that the related
advertising is delivered.  For LifeCycle E-mail services, revenue is generally
recognized when email impressions are delivered.  Revenue is generally
recognized for consulting under the percentage of completion method of
accounting.

     Revenue is deferred in cases where the Company has not yet earned
advertising revenue due to billing the customer or receiving payment from the
customer prior to providing the services. Revenue is recognized only when
collection of the resulting receivable is reasonably assured.

     Computation of Basic and Diluted Net Loss Per Share:   Historical net loss
per share has been calculated under Statement of Financial Accounting Standards
No. 128 "Earnings per Share." Basic net loss per share on a historical basis is
computed using the weighted average number of shares of common stock
outstanding. Unvested outstanding shares subject to repurchase rights are
excluded from the calculation. No diluted loss per share information has been
presented in the accompanying consolidated statements of operations since
potential common shares issued upon conversion of preferred stock, and exercise
of common stock options and warrants are antidilutive.

                                       7
<PAGE>

                                AVENUE A, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                March 31, 2001
               (in thousands except share and per share amounts)
                                  (unaudited)


3. Initial Public Offering

     On February 29, 2000, the Company completed its initial public offering of
6,037,500 shares of common stock (including the underwriters' over-allotment
shares) at a purchase price of $24.00 per share. The net proceeds to the Company
from the offering were approximately $132,500, after deducting applicable
issuance costs and expenses. Upon the close of the initial public offering, each
share of preferred stock then outstanding was converted into 1.5 shares of
common stock and a warrant to purchase 677,710 shares of common stock was
exercised.

4. Earnings Per Share

     The following is a reconciliation of the numerators and denominators used
in computing basic and diluted earnings per share:

<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                          ------------------
                                                                              March 31,
                                                                              ---------
                                                                          2001              2000
                                                                      -----------        -----------
<S>                                                                   <C>                <C>
Net Loss (numerator for basic and diluted):.......................    $   (13,480)       $    (9,260)
                                                                      ===========        ===========
Shares (denominator for basic and diluted):
  Gross weighted average common shares outstanding................     58,110,482         40,277,351
    Less:
    Weighted average common shares subject to repurchase..........      1,382,384          3,613,020
                                                                      -----------        -----------
Shares used in computation........................................     56,728,098         36,664,331
                                                                      ===========        ===========
Basic and diluted net loss per share..............................    $      (.24)       $      (.25)
                                                                      ===========        ===========
</TABLE>

5. Segment Reporting

     In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131). SFAS 131 changes the way
companies report selected segment information in annual financial statements and
requires companies to report selected segment information in interim financial
reports to shareholders. SFAS 131 was effective for the Company's year ended
December 31, 1999. Effective January 1, 2001, the Company is organized into two
operating segments: Avenue A and Atlas DMT.

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. During the quarter ended March
31, 2001, Avenue A generated revenue of $24,135 and related operating income of
$484, and Atlas DMT generated an operating loss of $4,900. The Company had no
significant sales to international customers.

     Pursuant to SFAS 131, total segment assets have not been disclosed as this
information is not reported to or used by the chief operating decision maker.
Additionally, substantially all of the Company's assets are located in the
United States as of March 31, 2001.

                                       8
<PAGE>

                                AVENUE A, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                March 31, 2001
               (in thousands except share and per share amounts)
                                  (unaudited)


6. Corporate Restructuring Charges

     During January 2001, the Company initiated a cost reduction program that
resulted in the termination of approximately 70 employees.  The Company
recognized restructuring charges of $1,500, which included $1,100 relating to
employee severance and benefits for terminated employees, of which $737 has been
paid as of March 31, 2001, and $400 related to future cash outlays that are
expected to be incurred during 2001 from existing lease agreements for office
space that is no longer in use and other liabilities for which there is a
contractual obligation, of which $126 has been paid as of March 31, 2001.  The
remaining amounts are included in the accrued liabilities in the accompanying
condensed consolidated balance sheet.

7. Legal Proceedings

     The Company is currently the subject of four lawsuits concerning the
collection and use of Internet user information.  The Company believes all of
these lawsuits are without merit and is vigorously defending against them.

     In Chance et al. v. Avenue A, Inc., plaintiffs, on behalf of themselves and
all others similarly situated throughout the nation, filed a class action
complaint against the Company on or about November 20, 2000 in the United States
District Court for the Western District of Washington. The complaint contains
the following purported claims relating to the Company's collection and use of
Internet user information: (1) violation of 18 U.S.C. section 2510 et seq. (the
Wiretap/Interception section of the Electronic Communications Privacy Act), (2)
violation of 18 U.S.C. section 2701 et seq. (the Access to Stored Information
section of the Electronic Communications Privacy Act), (3) violation of 18
U.S.C. section 1030 et seq. (the Computer Fraud and Abuse Act), (4) common law
trespass to personal property, (5) common law invasion of privacy, (6) unjust
enrichment, (7) violation of state consumer protection and deceptive practices
statutes, and (8) declaratory judgment. The plaintiffs seek declaratory and
injunctive relief as well as monetary damages and disgorgement of profits that
Avenue A has received in connection with the alleged illegal practices.  On
April 23, 2001, plaintiffs filed a consolidated class action complaint, which
contains the same claims as the original complaint and which adds claims for
common law conversion and violation of RCW section 9.73.030 et seq. (the
Washington Wiretap/Interception Statute).  Plaintiffs have moved for class
certification and the Company has filed an opposition to that motion. The
Company has also filed a motion for summary judgment, requesting that the Court
dismiss plaintiffs' federal claims and decline jurisdiction over plaintiffs'
state claims. A trial date has been set for June 2002.

     In Bowles v. Avenue A, Inc., the plaintiff, on behalf of himself and all
others similarly situated throughout the nation, filed a class action complaint
against the Company on or about December 27, 2000 in the United States District
Court for the Northern District of Illinois. This suit raises most of the same
claims and requests substantially the same relief as the Chance case.  On May 3,
2001, the plaintiff filed a motion for voluntary dismissal of the case, in order
to permit the plaintiff to be joined as an additional plaintiff in the Chance
case in the Western District of Washington.

                                       9
<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

     The discussion in this report contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed below. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in the section entitled "Additional Factors that May Affect Our
Business, Future Operating Results and Financial Condition", included elsewhere
in this report. When used in this document, the words "believes," "expects,"
"anticipates," "intends," "plans" and similar expressions, are intended to
identify certain of these forward-looking statements. However, these words are
not the exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. The cautionary
statements made in this document should be read as being applicable to all
related forward-looking statements wherever they appear in this document.

Overview

     We provide technology-based Internet advertising services to businesses. We
use Internet media planning and buying, proprietary ad management technology,
anonymous user profiling and data analysis systems to help advertisers increase
the effectiveness and return on investment of their Internet advertising
campaigns. Through this approach we have developed an extensive knowledge base
of Internet advertising strategies, targeting methods and media placements that
perform effectively. We focus on serving the needs of buyers of Internet
advertising, providing a service that harnesses the complexity, interactivity
and dynamic nature of the Internet with the objective of delivering the most
successful advertising campaigns for our clients. Through our Atlas DMT
division, we will also make our technology services available to online and
traditional advertising agencies who would use it to support the Internet
advertising needs of their clients.

     Our core services include media planning and buying, ad serving, campaign
analysis, optimization and data collection and aggregation. We also generate
revenue through our Strategic Partnership Program, in which we manage longer
term exclusive or complex partnerships between our clients and Web sites or
advertising networks; consulting services, in which we develop and maintain an
evolving suite of proprietary analytical tools, fed by Avenue A data, that lend
insight into how customers and prospective customers are likely to behave in the
future; our LifeCycle E-mail Service, in which we deliver targeted emails to
specific customer segments; and the Customer Targeting Program, in which we
deliver tailored advertisements to the browsers of users that have previously
visited our clients' Web sites.

     The majority of our revenue has been recognized on a gross basis in
accordance with the final consensus reached by the Emerging Issues Task Force
(EITF) in July 2000 on EITF 99-19 "Reporting Revenue Gross as a Principal versus
Net as an Agent."  Revenue generated under gross method contracts, which
consists of the gross value of our billings to our clients, includes the price
of the advertising space that we purchase from Web sites to resell to our
clients.  To generate revenue under these contracts, we purchase advertising
space from publisher Web sites and sell the purchased space to our clients and
are ultimately responsible for payment to Web sites for the cost of space we
purchase.  We also recognize revenue for certain contracts with clients under
the net method.  To generate revenue under net method contracts, we buy
advertising space from publisher Web sites on behalf of our clients and earn
fees based on the dollar amount of advertising space we purchase. Under net
method contracts, our clients are ultimately responsible for payment to the
publisher Web sites for the cost of the advertising space purchased.  If it were
determined that use of the gross method would result in adverse tax consequences
to us (for which we have made adequate reserves), we would consider
restructuring most or all of our contracts with clients and publishers in order
to utilize the net method for such contracts.  All such revenue is recognized
over the period that the related advertising is delivered.  For our LifeCycle E-
mail services, revenue is generally recognized when email impressions are
delivered.  Revenue is generally recognized for our consulting services under
the percentage of completion method of accounting.

                                       10
<PAGE>

     We believe that our operating results will continue to be subject to
seasonal fluctuations because retail advertisers generally purchase
substantially more advertising space during the fourth calendar quarter of each
year than during other quarters, particularly the first calendar quarter.

Results of Operations

 Comparison of the Three Months Ended March 31, 2001 and March 31, 2000

     The following table presents, in dollars and as a percentage of revenue,
unaudited statements of operations data for the three months ended March 31,
2001 and March 31, 2000. This information reflects all adjustments, consisting
only of normal recurring adjustments, that we consider necessary for a fair
presentation of such information. The results of any period are not necessarily
indicative of results for any future period.

<TABLE>
<CAPTION>
                                                                                   Three Months Ended March 31,
                                                                                   ----------------------------
                                                                               2001                             2000
                                                                               ----                             ----
                                                                             (in thousands except percentage amounts)
<S>                                                                     <C>               <C>              <C>             <C>
Consolidated Statements of Operations Data:

Revenue                                                                 $  24,135         100.0 %          $ 46,774        100.0 %
Expenses:
  Cost of revenue                                                          18,454          76.5 %            38,515         82.3 %
  Client support                                                            3,348          13.9 %             3,326          7.1 %
  Product development                                                       3,507          14.5 %             1,577          3.4 %
  Selling, general and administrative                                       6,949          28.8 %             6,017         12.9 %
  Depreciation and amortization of property and equipment                   1,462           6.1 %               608          1.3 %
  Amortization of intangible assets                                           502           2.1 %               510          1.1 %
  Amortization of deferred stock compensation                               3,836          15.9 %             6,190         13.2 %
  Corporate restructuring charges                                           1,500           6.2 %                --           -- %
                                                                        ---------         ------           --------        ------
     Total expenses                                                        39,558         163.9 %            56,743        121.3 %
                                                                        ---------         ------           --------        ------
Loss from operations                                                      (15,423)        (63.9)%            (9,969)       (21.3)%
Interest income, net                                                        1,943           8.1 %               709          1.5 %
                                                                        ---------         ------           --------        ------
Net loss                                                                $ (13,480)        (55.8)%          $ (9,260)       (19.8)%
                                                                        =========         ======           ========        ======
</TABLE>

     Revenue.  Revenue decreased to $24.1 million for the three months ended
March 31, 2001 from $46.8 million for the three months ended March 31, 2000. The
decrease in revenue was primarily due to a decrease in the number of clients to
56 as of March 31, 2001 from 96 as of March 31, 2000. The reduction in clients
was primarily due to our shift from clients that are Internet companies to
clients that we can serve profitably. Revenue also declined due to the general
weakening of the economy, which has caused some companies to reduce advertising
expenditures, and the effects of difficulties experienced by Internet-related
companies, which has reduced or eliminated online advertising expenditures from
some companies in this industry segment. We expect this trend to continue for
the remainder of 2001.

     Cost of revenue.  Cost of revenue consists mainly of the costs of
advertising space that we purchase from publishers' Web sites and the variable
costs of delivering the advertisements over the Internet. It also consists of
costs paid to third parties for email delivery. Cost of revenue decreased to
$18.5 million, or 76.5% of revenue, for the three months ended March 31, 2001
from $38.5 million, or 82.3% of revenue, for the three months ended March 31,
2000. The dollar decrease in cost of revenue was primarily due to decreases in
the volume of advertising space we purchased. The percentage decrease in cost of
revenue was primarily due to increased revenue contribution from higher margin
products such as the Strategic Partnership Program and consulting and improved
pricing in our core services. We expect that our cost of revenue as a percentage
of sales will decrease slightly throughout 2001.

                                       11
<PAGE>

     Client support.  Client support expenses consist primarily of salaries and
related expenses for client support personnel. These include employees within
our Client Service teams as well as employees who support other revenue products
such as the Strategic Partnership Program and consulting. Client support
expenses were $3.3 million, or 13.9% of revenue, for the three months ended
March 31, 2001 and $3.3 million, or 7.1% of revenue for the three months ended
March 31, 2000. Client support expenses increased due to expenses incurred
internationally, offset by a reduction in workforce completed during January
2001. The increase in client support expenses as a percentage of revenue was
primarily due to our revenue decreasing at a faster rate than our expenses.

     Product development.  Product development expenses consist of salaries and
related expenses for product development as well as research and development
personnel. In addition, product development expenses include the costs of
software development and the costs incurred for preparing our Atlas Digital
Marketing Suite for external clients. Product development expenses increased to
$3.5 million, or 14.5% of revenue, for the three months ended March 31, 2001
from $1.6 million, or 3.4% of revenue, for the three months ended March 31,
2000. The increases in product development expenses were primarily due to
increases in the number of personnel in product and software development for our
Atlas Digital Marketing Suite partially offset by a reduction in workforce
completed during January 2001. We expect to incur incremental expenses during
the year associated with the costs to prepare our Atlas Digital Marketing Suite
for external clients.

     Selling, general and administrative.  Selling, general and administrative
expenses consist primarily of salaries and related expenses for executive,
sales, finance, marketing, human resource and administrative personnel and other
general corporate expenses including rent. In addition, these expenses include
marketing costs such as trade shows and the costs of advertising our services in
trade publications. Selling, general and administrative expenses increased to
$6.9 million, or 28.8% of revenue, for the three months ended March 31, 2001
from $6.0 million, or 12.9% of revenue, for the three months ended March 31,
2000. The increases in selling, general and administrative expenses were
primarily due to increases in sales commissions, legal, and rent expenses. These
increases were partially offset by a decrease in personnel expenses as a result
of the reduction in force during January 2001. We do not expect these expenses
to increase as a percentage of revenue for the remainder of the year.

     Depreciation and amortization of property and equipment.  Depreciation and
amortization of property and equipment consists primarily of depreciation
expense on computer equipment, furniture and fixtures, and software costs and
amortization expense of leasehold improvements. Depreciation and amortization of
property and equipment increased to $1.5 million, or 6.1% of revenue, for the
three months ended March 31, 2001 from $608,000, or 1.3% of revenue, for the
three months ended March 31, 2000. The increases were primarily due to purchases
of assets during 2001 and 2000.

     Amortization of intangible assets.  Amortization of intangible assets
relates to the customer base and workforce assets recorded in connection with
the purchase of Avenue A/NYC LLC. Amortization of intangible assets was
$502,000, or 2.1% of revenue, and $510,000, or 1.1% of revenue, for the three
months ended March 31, 2001 and 2000, respectively. The increase in amortization
of intangible assets as a percentage of revenue was primarily due to our revenue
decreasing at a faster rate than our expenses.

     Amortization of deferred stock compensation.  Amortization of deferred
stock compensation consists of expenses related to employee stock option grants
with option exercise prices below the deemed fair value of our common stock as
of the date of grant. Deferred stock compensation is being amortized on an
accelerated basis over the four-year vesting period of the applicable options.
Amortization of deferred stock compensation decreased to $3.8 million, or 15.9%
of revenue, for the three months ended March 31, 2001 from $6.2 million, or
13.2% of revenue, for the three months ended March 31, 2000. The dollar decrease
was primarily related to the decrease in deferred stock compensation due to the
cancellation of unvested stock options as a result of

                                       12
<PAGE>

employee termination. The increase in amortization of deferred stock
compensation as a percentage of revenue was primarily due to our revenue
decreasing at a faster rate than our expenses.

     Corporate restructuring charges.  Corporate restructuring charges consist
of severance costs and other expenses of $1.5 million associated with our
reduction in workforce which included $1.1 million relating to employee
severance and benefits for terminated employees and $400,000 related to future
cash outlays that are expected to be incurred during 2001 from existing lease
agreements for office space that is no longer in use and other liabilities for
which there is a contractual obligation.

     Interest income, net.  Net interest income consists of earnings on our cash
and cash equivalents. Net interest income increased to $1.9 million, or 8.1% of
revenue, for the three months ended March 31, 2001 from $709,000, or 1.5% of
revenue, for the three months ended March 31, 2000. The increase in net interest
income was primarily due to higher invested cash balances resulting from our
initial public offering of common stock in February 2000.

     Our quarterly and annual revenue, expenses and operating results have
fluctuated in the past and are likely to fluctuate significantly in the future
due to a variety of factors, many of which are beyond our control. Because of
these fluctuations, we believe that period-to-period comparisons are not a good
indication of our future financial performance.

Liquidity and Capital Resources

     Since inception we have financed our operations primarily through the net
proceeds from private sales of equity securities, which raised $30.4 million
through December 31, 1999, and our initial public offering of common stock,
which raised $132.5 million during the first quarter of 2000.

     As of March 31, 2001, we had cash and cash equivalents of $44.9 million and
short-term investments of $79.6 million. We have a $6.0 million equipment term
loan facility with a bank which was fully utilized as of March 31, 2001.

     Cash used in operating activities was $9.3 million and $8.2 million for the
three months ended March 31, 2001 and 2000, respectively.

     Cash provided by investing activities was $15.4 million for the three
months ended March 31, 2001. Cash used in investing activities was $67.0 million
for the three months ended March 31, 2000. Cash provided by investing activities
for the three months ended March 31, 2001 was primarily related to sales of
marketable securities offset by purchases of equipment for our production
systems and purchases of software.

     Cash used in financing activities was $163,000 for the three months ended
March 31, 2001.  Cash used by financing activities was primarily due to the
payments of notes payable during the three months ended March 31, 2001.  Cash
provided by financing activities was $137.8 million for the three months ended
March 31, 2000. Cash provided by financing activities during the three months
ended March 31, 2000 primarily related to the net proceeds from our initial
public offering of common stock in February 2000.

     As of March 31, 2001, we had no material commitments other than obligations
under operating leases for office space and office equipment, of which some
commitments extend through 2010, and a note payable to a bank which requires
monthly payments through 2003. This note is secured by the equipment purchased
with the proceeds from the note.

     Since our inception, we have significantly increased our operating
expenses. It is possible that we will continue to experience some growth in our
operating expenses and, if we do, such expenses could be a material

                                       13
<PAGE>

use of our cash resources. We believe that our current cash, cash equivalents
and short-term investments will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next 12 months.

Additional Factors That May Affect Our Business, Future Operating Results and
Financial Condition

     You should carefully consider the following factors that may affect our
business, future operating results and financial condition, as well as other
information included in this Form 10-Q.  The risks and uncertainties described
below are not the only ones we face.  Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations.  If any of the following risks actually occur, our
business, financial condition and operating results could be materially
adversely affected.

     We are subject to risks frequently encountered by companies in the Internet
     advertising market

     Our prospects for financial and operational success must be considered in
light of the risks frequently encountered by companies in the Internet
advertising industry.  These risks include the need to:

 . attract new clients and maintain current client relationships;

 . achieve effective advertising campaign results for our clients;

 . continue to develop and upgrade our technologies to keep pace with the growth
  of the Internet advertising market and changes in technology;

 . continue to expand the number of services we offer;

 . successfully implement our business model, which is evolving;

 . maintain our reputation and build trust with our clients; and

 . identify, attract, retain and motivate qualified personnel.

     If we do not successfully address these risks, our business could suffer.

     We have a history of losses and may not achieve profitability

     We incurred net losses of $58.8 million for the period from our inception
on July 1, 1997 through December 31, 2000, and a net loss of $13.5 million for
the three months ended March 31, 2001. As of March 31, 2001, our accumulated
deficit was $71.7 million. We have not achieved profitability and may not do so
in the future. We expect to continue to make significant operating and capital
expenditures and, as a result, we may need to generate significant additional
revenue to achieve and maintain profitability. We cannot assure you that we will
generate sufficient revenue to achieve profitability. Even if we do achieve
profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future. If our revenue grows
more slowly than we anticipate or declines, or if our operating expenses exceed
our expectations or cannot be reduced, we may be unable to achieve or maintain
profitability.

     Our quarterly operating results are subject to fluctuations that may cause
     our stock price to decline

     Our quarterly operating results have fluctuated in the past and are likely
to continue to do so in the future.  It is possible that in the future our
operating results in a particular quarter or quarters will not meet the
expectations of securities analysts, investors or Avenue A.  If our operating
results fail to meet these expectations, the market price of our common stock
could decline.  We believe that quarter-to-quarter

                                       14
<PAGE>

comparisons of our operating results are not a good indication of our future
performance and should not be relied upon to predict the future performance of
our stock price.

     Our revenue, expenses and operating results could vary significantly from
quarter to quarter for several reasons, including:

 . fluctuating demand for our advertising services and changes in the mix of
  advertisements placed and services provided;

 . addition of new clients or loss of current clients;

 . seasonal fluctuations in advertising spending;

 . timing variations on the part of advertisers to implement advertising
  campaigns;

 . changes in the availability and pricing of advertising space;

 . timing and amount of our costs; and

 . costs related to any possible future acquisitions of technologies or
  businesses.

     Our current and future expense estimates are based, in large part, on
estimates of future revenue, which is difficult to predict. In particular, we
plan to increase our operating expenses as needed in order to enhance our
proprietary technology and to expand our client services, sales and marketing
operations. If our expenses are not accompanied by sufficient revenue in the
same quarter, our quarterly operating results could be harmed.

     The Internet advertising market may deteriorate, or develop more slowly
     than expected, which could harm our business

     If the market for Internet advertising deteriorates, or develops more
slowly than we expect, our business could suffer. Our future success is highly
dependent on an increase in the use of the Internet, the commitment of
advertisers to the Internet as an advertising medium, on the willingness of our
potential clients to outsource their Internet advertising and marketing needs,
and on our ability to sell technology services to advertising agencies. The
Internet advertising market is relatively new and rapidly evolving. As a result,
demand and market acceptance for Internet advertising services is uncertain.
Many of our current or potential clients have little or no experience using the
Internet for advertising purposes and have allocated only a limited portion of
their advertising budgets to Internet advertising. Also, we must compete with
traditional advertising media, including television, radio, cable and print, for
a share of our clients' total advertising budgets. Our current and potential
clients may find Internet advertising to be less effective than traditional
advertising media for promoting their products and services, and therefore the
market for Internet advertising services may deteriorate or develop more slowly
than expected. In addition, "filter" software programs are available that limit
or prevent advertising from being delivered to an Internet user's computer. The
widespread adoption of such software could significantly undermine the
commercial viability of Internet advertising.

     Our operating results may fluctuate seasonally, and these fluctuations may
     cause our stock price to decline

     Our stock price may decline due to seasonal fluctuations. We believe that
our operating results will fluctuate depending on the season because retail
advertisers generally purchase substantially more advertising space during the
fourth calendar quarter of each year than during other quarters, particularly
the first calendar

                                       15
<PAGE>

quarter. Given our limited operating history, we cannot be certain how
pronounced these seasonal trends may be or what, if any, other seasonal trends
may emerge that would affect our business.

     Our business may be seriously harmed by third-party claims against us
     relating to the collection and use of Internet user information

     We are a defendant in pending class action lawsuits alleging, among other
things, that our collection and use of Internet user information violates
federal and state laws.  We may be subject to additional suits in the future
regarding our collection and use of Internet user information.  Class action
litigation is often expensive and time-consuming, and the outcome of such
litigation is often uncertain.  Such lawsuits, regardless of their outcome, may
cause us to incur significant expenses and divert the attention of our
management and key personnel from our business operations.  In addition, such
lawsuits may require us to pay substantial damages, be prevented from conducting
targeted advertising and aggregating data from our clients' advertising
campaigns, and otherwise seriously harm our business.  Furthermore, several
Internet-related companies, including some in the Internet advertising industry,
have had claims brought against them before the Federal Trade Commission,
regarding the collection and use of Internet user information, and we may be
subject to similar claims.  Such claims and any other claim by a government
entity or other third party against us regarding our collection and use of
Internet user information could seriously harm our business.  See "Legal
Proceedings."

     Privacy concerns could lead to legislative and other limitations on our
     ability to collect personal data from Internet users, including limitations
     on our use of cookie or action tag technology and user profiling

     Privacy concerns could lead to legislative and other limitations on our
ability to conduct targeted advertising campaigns and compile data that we use
to formulate campaign strategies for our clients.  Our systems use "cookies" and
"action tags" to track Internet users and their online behavior to build
anonymous user profiles.  A cookie is a small file of information stored on a
user's computer that allows us to recognize that user's browser when we serve
advertisements.  An action tag functions similarly to a banner ad, except that
the action tag is not visible.  Our action tags may be placed on specific pages
of our clients' or prospective clients' websites and some Lifecycle E-mails.
This enables our measurement of an advertising campaign's effectiveness to drive
consumers to specific actions.  We are substantially dependent on cookie and
action tag technology to target our clients' advertising campaigns and measure
their effectiveness.  Any reduction in our ability to use cookies or action tags
or other means to build anonymous user profiles could harm our business.
Governmental bodies concerned with the privacy of Internet users have suggested
limiting or eliminating the use of cookies, action tags or user profiling.
Bills aimed at regulating the collection and use of personal data from Internet
users are currently pending in Congress and many state legislatures.  Also, the
Federal Trade Commission and the Department of Commerce have conducted hearings
regarding user profiling, the collection of non-personally identifiable
information and online privacy.  In addition, privacy concerns have led to legal
and technical limitations on the use of cookies, action tags and user profiling
in some jurisdictions.  For example, the European Union has adopted a directive
addressing data privacy that may result in limitations on the collection and use
of information regarding European Internet users.  Also, Germany has imposed its
own laws limiting the use of user profiling, and other countries may impose
similar limitations.  In addition, users may limit or eliminate the placement of
cookies on their computers by using third-party software that blocks cookies, or
by disabling the cookie functions of their Internet browser software.  Also,
third parties have brought class action lawsuits against us relating to our use
of cookies, and we may be subject to similar lawsuits in the future.  If our
ability to use cookies or action tags or build user profiles were substantially
restricted by technology, government regulation or any other means, or as a
result of litigation, we would likely have to use other technology or methods
that allow the gathering of user profile data in other ways in order to provide
our services to our clients.  This change in technology or methods could require
significant reengineering time and resources, and might not be done in time to
avoid negative consequences to our business.  In addition, alternative
technology or methods might not be available on commercially reasonable terms,
if at all.

                                       16
<PAGE>

     Our client contracts have short terms, and the loss of a significant number
     of these contracts in a short period of time could harm our business

     We derive substantially all of our revenue from the sale of advertising
services under short-term advertising campaign services contracts, all of which
are cancelable upon 90 days' or less notice.  In addition, these contracts
generally do not contain penalty provisions for cancellation before the end of
the contract term.  The non-renewal, cancellation or deferral of a significant
number of these contracts in any one period could cause an immediate and
significant decline in our revenue and harm our business.

     Some of our competitors have obtained patents and have sued other parties
     to enforce their rights under these patents, and we may also be subject to
     patent infringement claims, including claims that our ad serving
     technologies, processes or methods infringe these or other patents

     Other parties may claim that our technologies, processes or methods
infringe their patents. Any such claim may cause us to incur significant
expenses and, if successfully asserted against us, may cause us to pay
substantial damages and prevent us from providing some of our services,
including our core ad serving services, which would substantially harm our
business. U.S. patents were issued to DoubleClick Inc. in September 1999 and to
24/7 Media in February 2000. These patents may cover some of the technologies,
processes or methods that we use in our ad serving systems. We cannot assure you
that we will be able to distinguish our technologies, processes or methods from
those covered under the DoubleClick patent or 24/7 Media patent or that either
of these patents would be invalidated if challenged. The patent field covering
Internet-related technologies is rapidly evolving and surrounded by a great deal
of uncertainty, and other patents or patent applications relating to the
delivery of Internet advertising may exist of which we are unaware. Several
companies in the Internet advertising field have brought patent infringement
suits against competitors in connection with patents relating to ad serving
technologies.

     Any patent infringement claims brought against us may cause us to incur
significant expenses and, if successfully asserted against us, may cause us to
pay substantial damages and limit our ability to use the intellectual property
subject to these claims.  Even if we were to prevail, any litigation would
likely be costly and time-consuming and divert the attention of our management
and key personnel from our business operations.  Furthermore, as a result of a
patent infringement suit, we may be prevented from providing some of our
services, including our core ad serving services, unless we enter into royalty
or license agreements.  We may not be able to obtain royalty or license
agreements on terms acceptable to us, if at all.

     In addition to patent infringement claims, third parties may assert other
     intellectual property claims, which may cause us to incur significant
     expenses, pay substantial damages and be prevented from providing our
     services

     In addition to patent infringement claims, third parties may claim that we
are infringing or violating their other intellectual property rights, including
their copyrights, trademarks and trade secrets, which may cause us to incur
significant expenses and, if successfully asserted against us, pay substantial
damages and be prevented from providing our services, which would substantially
harm our business.  Even if we were to prevail, any litigation regarding our
intellectual property could be costly and time-consuming and divert the
attention of our management and key personnel from our business operations.
Furthermore, as a result of an intellectual property infringement suit, we may
be prevented from providing some of our services or using some of the service
marks for which we have sought service mark protection, unless we enter into
royalty or license agreements.  We may not be able to obtain royalty, license or
coexistence agreements on terms acceptable to us, if at all.

     Our use of the name "Avenue A" may result in infringement claims and other
     legal challenges, which could cause us to incur significant expenses, pay
     substantial damages and be prevented from using this name

                                       17
<PAGE>

     Our use of the name "Avenue A" may result in infringement claims and other
legal challenges, which could cause us to incur significant expenses, pay
substantial damages and be prevented from using this name.  We are aware of
third parties that use marks or names, including Internet domain names, that
contain the words "Avenue A" or similar words, one of which is a Canadian
advertising agency.  There may be other third parties using names similar to
ours of whom we are unaware.  We may be subject to trademark infringement claims
by third parties as a result of our use of the name "Avenue A."  In addition, we
may not receive registration of our service mark application for the name
"Avenue A."  This application has been opposed by third parties, and even if the
application is registered, the service mark may be challenged by third parties
or invalidated.  As a result of such infringement claims or challenges, we may
incur significant expenses, pay substantial damages and be prevented from using
the name "Avenue A" unless we enter into royalty, license or coexistence
agreements.  We may not be able to obtain royalty, license or coexistence
agreements on terms acceptable to us, if at all.  Use of the name "Avenue A" or
similar names by third parties may also cause confusion to our clients and
confusion in the market, which could decrease the value of our brand and harm
our reputation.

     The loss of key personnel or any inability to attract and retain additional
     personnel could impair our ability to maintain or expand our business

     The loss of the services of members of our management team or other key
employees could harm our business.  Our future success depends to a significant
extent on the continued service of our key management, client service,
analytics, sales and technical personnel.  We do not maintain key person life
insurance on any of our executive officers and do not intend to purchase any in
the future.  Although we generally enter into noncompetition agreements with our
employees, our business could be harmed if one or more of our officers or key
employees decided to join a competitor or otherwise compete with us.

     Our future success also depends on our ability to attract, retain and
motivate highly skilled personnel.  Competition for qualified personnel in the
Internet and technology industries is intense.  If we fail to hire and retain a
sufficient number of client service, analytics, sales and technical personnel,
we will not be able to maintain or expand our business.

     Some of our clients have limited operating histories, are unprofitable and
     may not be able to pay for our services

     If any of our current or future clients is unable to pay for our services,
our business could suffer.  Some of our clients have limited operating histories
and have not achieved profitability.  In the past we have lost clients, or have
had difficulty collecting payments from clients, who could not pay for our
services because they were unable to secure ongoing funding.  The ability of
many of our clients to meet their payment obligations is affected by the risks
and difficulties encountered by companies with limited operating histories,
particularly in the evolving Internet market.

     We may not be able to compete successfully in the market for Internet
     advertising

     The market for Internet advertising is relatively new, yet intensely
competitive.  We compete most directly with Internet media buyers that integrate
ad serving technology and Internet media buying, such as AppNet Inc., through
its i33 Communications division, and MediaPlex, Inc.  We also compete with:

 . interactive advertising agencies, such as Modem Media Poppe Tyson Inc., Ogilvy
  & Mather Worldwide through its OgilvyOne division, and Saatchi & Saatchi
  Advertising, through its Darwin Digital Media Services division;

 . enabling online advertising technology providers, such as At Home Corporation,
  through its MatchLogic, Inc. subsidiary, CMGI, Inc., through its AdForce,
  Inc., AdKnowledge, Inc. and Engage Technologies, Inc. subsidiaries, and
  DoubleClick Inc.;

                                       18
<PAGE>

 . advertising networks, such as DoubleClick Inc., CMGI, Inc., through its
  Flycast Communications Corporation subsidiary, L90, Inc. and 24/7 Media, Inc.;

 . targeted email service providers, such as At Home Corporation, through its
  MatchLogic, Inc. subsidiary, ClickAction Inc., Digital Impact, Inc.,
  DoubleClick Inc., E-Dialog, Inc. and Message Media, Inc.; and

 . traditional advertising agencies that perform Internet advertising and
  marketing as part of their services to clients, such as Ogilvy & Mather
  Worldwide and Saatchi & Saatchi Advertising.

     Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
client bases and significantly greater financial, technical and marketing
resources than we have.  Also, many of our current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties.  In addition, several of our competitors have combined or
may combine in the future with larger companies with greater resources than
ours.  These competitors may engage in more extensive research and development,
undertake more far-reaching marketing campaigns and make more attractive offers
to existing and potential employees and clients than we do.  They could also
adopt more aggressive pricing policies and may even provide services similar to
ours at no additional cost by bundling them with their other product and service
offerings.  They may also develop services that are equal or superior to our
services or that achieve greater market acceptance than our services.  In
addition, our competitors may develop databases that are larger than or
otherwise superior to our databases.  Increased competition is likely to result
in price reductions, reduced gross margins and loss of market share.  We cannot
assure you that we will be able to compete successfully, and competitive
pressures may harm our business.

     Consolidation in the Internet industry may impair our ability to retain our
     clients

     Some of our clients may be affected by rapid consolidation in the Internet
industry.  Our business would suffer if we were to lose a substantial number of
clients or any of our significant clients as a result of consolidation.  These
clients may be required to use the advertising services of the companies that
acquire them or of other advertising service providers, or may use the
advertising services of companies that they acquire.

     Consolidation of Internet advertising networks and large Internet portals
     may impair our ability to serve advertisements, to acquire advertising
     space at favorable rates and to collect campaign data

     The consolidation of Internet advertising networks and large Internet
portals could harm our business. This type of consolidation could eventually
lead to a concentration of desirable advertising space on a very small number of
networks and large Web sites. This type of concentration could substantially
impair our ability to serve advertisements if these networks or large Web sites
decide not to permit us to serve advertisements on their Web sites or if they
develop ad placement systems that are not compatible with our ad serving
systems. These networks or Web sites could also use their greater bargaining
power to increase their rates for advertising space or prohibit or limit our
aggregation of advertising campaign data. In addition, concentration of
desirable advertising space in a small number of networks and Web sites could
diminish the value of our advertising campaign databases, as the value of these
databases depends on the continuous aggregation of data from advertising
campaigns on a variety of different Web sites and advertising networks.

     Sustained or repeated system failures could significantly impair our
     operations and lead to client dissatisfaction

     Sustained or repeated system failures could significantly impair our
operations and reduce the attractiveness of our services to our current and
potential clients.  The continuous and uninterrupted performance of our systems
is critical to our success.  Our operations depend on our ability to protect
these

                                       19
<PAGE>

systems against damage from fire, power loss, water damage, earthquakes,
telecommunications failures, viruses, vandalism and other malicious acts, and
similar unexpected adverse events. Clients may become dissatisfied by any system
failure that interrupts our ability to provide our services to them. In
particular, the failure of our ad serving systems, including failures that delay
or prevent the delivery of targeted advertisements to Web sites and advertising
networks, could reduce client satisfaction and damage our reputation.

     Our services are substantially dependent on systems provided by third
parties, over whom we have little control.  Interruptions in our services could
result from the failure of telecommunications providers and other third parties
to provide the necessary data communications capacity in the time frame
required.  Our ad serving systems and computer hardware are primarily located in
the Seattle, Washington metropolitan area at facilities operated by Exodus
Communications, Inc. and InterNAP Network Services Corporation.  We depend on
these third-party providers of Internet communication services to provide
continuous and uninterrupted service.  We also depend upon Internet service
providers that provide access to our services.  In the past, we have
occasionally experienced significant difficulties delivering advertisements to
Web sites and advertising networks due to system failures unrelated to our own
systems.  For example, power outages at one of our co-location facilities,
including one outage that lasted for approximately five hours, have prevented us
from serving advertisements, tracking user responses and providing performance
reports to our clients.  Any disruption in the Internet access provided by
third-party providers or any failure of third-party providers to handle higher
volumes of user traffic could impair our ability to deliver advertisements and
harm our business.

     Our operations may be adversely affected by earthquakes, power outages or
     increased energy costs in the Pacific Northwest

     Our corporate headquarters and a significant portion of our operations are
located in the Pacific Northwest.  The Pacific Northwest has from time-to-time
experienced earthquakes and experienced an earthquake in February 2001 that
caused significant damage in the region.  We do not know the ultimate impact on
our operations of being located near major earthquake faults, but an earthquake
could harm our operating results.  In addition, due to the ongoing power
shortages in California, the Pacific Northwest may experience power shortages or
outages or increased energy costs.  Power shortages or outages could cause
disruptions to our operations, which in turn may result in a material decrease
in our revenues and earnings and harm our business.  Power shortages or
increased energy costs in the Northwest could adversely affect the region's
economy and decrease regional demand for our advertising services, which could
reduce our revenues.  Our insurance coverage may not be adequate to cover the
losses and interruptions caused by earthquakes or power outages.

     Acquisitions or investments may be unsuccessful and may divert our
     management's attention and consume significant resources

     We may in the future acquire or make investments in other businesses, or
acquire products and technologies, to complement our current business.  Any
future acquisition or investment may require us to use significant amounts of
cash, make potentially dilutive issuances of equity securities and incur debt.
In addition, acquisitions involve numerous risks, any of which could harm our
business, including:

 . difficulties in integrating the operations, technologies, services and
  personnel of acquired businesses;

 . diversion of management's attention from other business concerns;

 . unavailability of favorable financing for future acquisitions;

 . potential loss of key employees of acquired businesses;

                                       20
<PAGE>

 . inability to maintain the key business relationships and the reputations of
  acquired businesses;

 . responsibility for liabilities of acquired businesses;

 . inability to maintain our standards, controls, procedures and policies; and

 . increased fixed costs.

     Clients may attempt to prohibit us from providing services to their
     competitors, limiting our business opportunities

     To use our services more effectively, clients often provide us with
confidential business and marketing information.  Many companies are wary of
third parties having access to this information, because access by third parties
increases the risk that confidential business and marketing information may
become known, even if unintentionally, to these companies' competitors.  These
confidentiality concerns may prompt our clients to attempt to contractually
prohibit us from managing the Internet advertising campaigns of their
competitors.  Limitation of our client base in a particular industry in this
manner could limit the growth of our business.

     International operations could impose burdens on our resources and divert
     management's attention from domestic operations

     International operations could impose burdens on our resources, divert
management's attention from domestic operations, and otherwise harm our
business.  Our international operations require significant management attention
and resources.  In addition, we may need to rely extensively on third parties in
foreign countries to help conduct our international operations, coordinate with
foreign Web sites and conduct sales and marketing efforts.  Furthermore,
international operations are subject to several inherent risks, including:

 . difficulties and costs of staffing and managing foreign offices;

 . the impact of recessions in economies outside the United States;

 . changes in regulatory requirements;

 . regulations relating to the export of consumer data;

 . more stringent rules relating to the collection and use of information
  regarding Internet users;

 . reduced protection of intellectual property rights;

 . adverse tax consequences;

 . political and economic instability;

 . tariffs and other trade barriers; and

 . fluctuations in currency exchange rates.

Our failure to address these risks adequately could harm our business.

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     Our business does not generate the cash needed to finance our operations,
     and we may need additional financing in the future, which we may be unable
     to obtain

     Our business does not currently generate the cash needed to finance our
operations.  We may need additional funds to finance our operations, as well as
to enhance our services, respond to competitive pressures or acquire
complementary businesses or technologies.  We may be unable to obtain financing
on terms favorable to us, if at all.  Poor financial results, unanticipated
expenses or unanticipated opportunities that require financial commitments could
give rise to additional financing requirements sooner than we expect.  If we
raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our existing shareholders would be
reduced, and these securities might have rights, preferences or privileges
senior to those of our common stock.  If adequate funds are not available or are
not available on acceptable terms, our ability to enhance our services, respond
to competitive pressures or take advantage of business opportunities would be
significantly limited, and we might need to significantly restrict our
operations.

     Legislation or regulations may be adopted that could impair our ability to
     provide our services to clients

     Legislation or regulations may be adopted that could impair our ability to
provide our services to clients.  The legal and regulatory environment governing
the Internet is uncertain and may change.  Laws and regulations may be adopted
covering issues such as privacy, pricing, acceptable content, taxation, consumer
protection and quality of products and services on the Internet.  These laws and
regulations could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as an advertising medium.  In addition,
due to the global nature of the Internet, it is possible that multiple federal,
state or foreign jurisdictions might inconsistently regulate our activities or
the activities of advertising networks or Web sites.  Any of these developments
could harm our business.

     Our service offering includes email advertising and marketing services. The
market for email advertising and marketing in general is vulnerable to the
negative public perception associated with unsolicited email. Various states
have enacted legislation and several bills have been introduced in Congress that
limit or prohibit the use of unsolicited email. Government action, public
perception or press reports related to solicited or unsolicited email could
reduce the overall demand for email advertising and marketing in general and our
email services in particular.

     We may not be able to adapt to rapidly changing Internet technology trends
     and evolving industry standards

     The Internet and Internet advertising markets are characterized by rapidly
changing technologies, evolving industry standards, frequent new product and
service introductions, and changing client demands.  The introduction of new
products and services embodying new technologies and the emergence of new
industry standards may render our services obsolete.  Our future success will
depend on our ability to adapt to rapidly changing technologies, enhance our
existing Internet advertising services and develop and introduce a variety of
new services to address our clients' changing demands.  We may experience
difficulties that could delay or prevent the successful design, development,
introduction or marketing of our services.  In addition, any new services or
enhancements must meet the requirements of our current clients and must achieve
significant market acceptance.  Material delays in introducing new services and
enhancements may cause clients to discontinue use of our services and use the
services of our competitors.

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     We cannot assure you that our common stock will continue to be listed on
     the Nasdaq National Market, and delisting could further depress our stock
     price and make it more difficult for us to raise capital

     Our common stock is currently listed on the Nasdaq National Market. To
maintain such listing, we must continue to satisfy ongoing listing requirements,
including consistently maintaining a minimum bid price for the common stock of
$1.00 per share or more. Our common stock has traded below the $1.00 minimum bid
requirement at certain times. If our common stock were to trade below the $1.00
minimum bid requirement for a period of 30 consecutive business days or more, or
if we were to otherwise fail to meet Nasdaq's ongoing listing criteria, Nasdaq
could initiate delisting procedures at any time. If we were to lose our Nasdaq
National Market status, we would likely seek listing of our common stock either
on the Nasdaq SmallCap Market or in the over-the-counter market, both of which
are viewed by many investors as less liquid marketplaces. Among other things,
our common stock may then constitute "penny stock," which would place increased
regulatory burden upon brokers, making them less likely to make a market in our
stock. Loss of our Nasdaq National Market status could also make it more
difficult for us to raise capital or complete acquisitions and would also
complicate compliance with state blue sky laws.

     Our stock price has been and may continue to be volatile

     The trading price of our common stock has been and is likely to continue to
be highly volatile.  For example, during the 57 week period ended April 27,
2001, the closing price of our common stock ranged from $.68 to $34.63 per
share.  The market price of our common stock may fluctuate significantly in
response to a number of factors, including:

 . quarterly variations in our operating results;

 . announcements by us or our competitors of new products or services,
  significant contracts, acquisitions or business relationships with other
  companies;

 . publicity about our company, our services, our competitors, or Internet
  advertising in general;

 . additions or departures of key personnel;

 . any future sales of our common stock or other securities; and

 . stock market price and volume fluctuations of other publicly traded companies
  and, in particular, those that are Internet-related.

     In the past, companies that have experienced volatility in the market price
of their stock have been subject to securities class action litigation.  We may
be the target of this type of litigation in the future.  Securities litigation
against us could result in substantial costs and divert our management's
attention, which could harm our business.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


     Our exposure to market risk is limited to interest income sensitivity,
which is affected by changes in the general level of U.S. interest rates,
particularly because the majority of our investments are in short-term,
investment-grade debt securities issued by corporations. We place our
investments with high-quality issuers and limit the amount of credit exposure to
any one issuer. Due to the nature of our short-term investments, we believe that
we are not subject to any material market risk exposure. We do not have any
foreign currency or other derivative financial instruments.

                         PART II.   OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We are currently the subject of four lawsuits concerning our collection and
use of Internet user information. We believe all of these lawsuits are without
merit and are vigorously defending against them.  Please see our Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.

     In Chance et al. v. Avenue A, Inc., plaintiffs, on behalf of themselves and
all others similarly situated throughout the nation, filed a class action
complaint against us on or about November 20, 2000 in the United States District
Court for the Western District of Washington. The complaint contains the
following purported claims relating to our collection and use of Internet user
information: (1) violation of 18 U.S.C. section 2510 et seq. (the
Wiretap/Interception section of the Electronic Communications Privacy Act), (2)
violation of 18 U.S.C. section 2701 et seq. (the Access to Stored Information
section of the Electronic Communications Privacy Act), (3) violation of 18
U.S.C. section 1030 et seq. (the Computer Fraud and Abuse Act), (4) common law
trespass to personal property, (5) common law invasion of privacy, (6) unjust
enrichment, (7) violation of state consumer protection and deceptive practices
statutes, and (8) declaratory judgment. The plaintiffs seek declaratory and
injunctive relief as well as monetary damages and disgorgement of profits that
Avenue A has received in connection with the alleged illegal practices.  On
April 23, 2001, plaintiffs filed a consolidated class action complaint, which
contains the same claims as the original complaint and which adds claims for
common law conversion and violation of RCW section 9.73.030 et seq. (the
Washington Wiretap/Interception Statute).  Plaintiffs have moved for class
certification and we have filed an opposition to that motion. We have also filed
a motion for summary judgment, requesting that the Court dismiss plaintiffs'
federal claims and decline jurisdiction over plaintiffs' state claims. A trial
date has been set for June 2002.

     In Bowles v. Avenue A, Inc., the plaintiff, on behalf of himself and all
others similarly situated throughout the nation, filed a class action complaint
against us on or about December 27, 2000 in the United States District Court for
the Northern District of Illinois. This suit raises most of the same claims and
requests substantially the same relief as the Chance case.  On May 3, 2001, the
plaintiff filed a motion for voluntary dismissal of the case, in order to permit
the plaintiff to be joined as an additional plaintiff in the Chance case in the
Western District of Washington.

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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     (d) Use of Proceeds

     On February 28, 2000, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 as filed with the Commission in
connection with our initial public offering of common stock, par value $0.01 per
share. The offering was co-managed by Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Thomas Weisel Partners LLC. Pursuant to the registration
statement, we registered and sold an aggregate of 6,037,500 shares of common
stock for a gross aggregate offering price of $144.9 million. In connection with
the offering, we incurred total expenses of approximately $12.4 million,
including underwriting discounts and commissions of approximately $10.1 million.
All of these expenses were direct or indirect payments to others and not
payments to our directors or officers (or their associates) or to our affiliates
or 10% shareholders. We placed all of the net offering proceeds in temporary
investments consisting of cash, cash equivalents and short-term investments.
None of the proceeds was used as payments to our directors or officers (or their
associates), or to our affiliates or 10% shareholders.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (b) Reports on Form 8-K

         No reports on Form 8-K were filed during the quarter ended March 31,
         2001.

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                                  SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 10, 2001.

                         AVENUE A, INC.


                                   /s/ MICHAEL VERNON
                         By:____________________________________________________
                                        Michael Vernon
                                   Chief Financial Officer
                            (Authorized Officer and Principal Financial Officer)

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