<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 September 30, 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
October 31, 2001 was 58,329,943.

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

                                       1

<PAGE>

                                 AVENUE A, INC.

                                    FORM 10-Q

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2001

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                            ----

                                    PART I. FINANCIAL INFORMATION
<S>                                                                                                         <C>
Item 1.  Condensed Consolidated Financial Statements ....................................................      3

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations ..........     13

Item 3.  Quantitative and Qualitative Disclosures About Market Risk .....................................     29

                                      PART II. OTHER INFORMATION

Item 1.  Legal Proceedings ..............................................................................     29

Item 2.  Changes in Securities and Use of Proceeds ......................................................     31

Item 6.  Exhibits and Reports on Form 8-K ...............................................................     32
</TABLE>

                                       2


<PAGE>

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

<TABLE>
<CAPTION>
                                                                                         September 30,      December 31,
                                                                                         -------------      ------------
                                                                                             2001               2000
                                                                                             ----               ----
                                                                                          (unaudited)
                                      Assets
<S>                                                                                       <C>                <C>
Current assets:
   Cash and cash equivalents ........................................................     $    37,349        $  38,888
   Short-term investments ...........................................................          79,999           95,257
   Accounts receivable, net of allowance of $1,510 and $3,616
     at September 30, 2001 and December 31, 2000, respectively ......................          13,764           39,343
   Other receivables ................................................................           2,691            1,824
   Prepaid expenses and other current assets ........................................             548              716
                                                                                          -----------        ---------
Total current assets ................................................................         134,351          176,028

Property and equipment, net .........................................................           8,465           13,087
Intangible assets, net ..............................................................           1,828            3,519
Other assets ........................................................................           1,321            5,671
                                                                                          -----------        ---------
Total assets ........................................................................     $   145,965        $ 198,305
                                                                                          ===========        =========

                            Liabilities and Shareholders' Equity

Current liabilities:
   Accounts payable .................................................................     $    13,455        $  42,449
   Accrued expenses .................................................................           9,254            6,215
   Notes payable, current portion ...................................................           2,000            2,000
   Deferred revenue .................................................................           1,185            1,084
                                                                                          -----------        ---------
Total current liabilities ...........................................................          25,894           51,748

Notes payable, less current portion .................................................           2,056            3,556
                                                                                          -----------        ---------
Total liabilities ...................................................................          27,950           55,304
                                                                                          -----------        ---------

Shareholders' equity:
   Common stock, $0.01 par value; 200,000 shares authorized; 58,092
     and 58,139 shares issued and outstanding at September 30, 2001 and
     December 31, 2000, respectively ................................................             581              581
   Paid-in capital ..................................................................         217,103          222,901
   Deferred stock compensation ......................................................          (5,851)         (21,566)
   Subscription receivable ..........................................................            (618)            (941)
   Accumulated deficit ..............................................................         (93,719)         (58,189)
   Accumulated other comprehensive income ...........................................             519              215
                                                                                          -----------        ---------
Total shareholders' equity ..........................................................         118,015          143,001
                                                                                          -----------        ---------
Total liabilities and shareholders' equity ..........................................     $   145,965        $ 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>
                                                                          Three Months Ended        Nine Months Ended
                                                                          ------------------        -----------------
                                                                             September 30,             September 30,
                                                                             -------------             -------------
                                                                           2001         2000         2001        2000
                                                                         --------     --------     --------   ---------
<S>                                                                      <C>          <C>          <C>        <C>
Revenue ............................................................     $ 20,399     $ 47,172     $ 65,136   $ 146,372
Expenses:
      Cost of revenue ..............................................       13,609       37,372       46,889     117,927
      Client support ...............................................        2,038        4,085        8,078      11,268
      Product development ..........................................        2,919        3,286        9,922       8,212
      Selling, general, and administrative .........................        4,650        7,964       18,705      21,101
      Depreciation and amortization of property and equipment ......        1,431        1,155        4,392       2,856
      Amortization of intangible assets ............................          504          503        1,503       1,510
      Amortization of deferred stock compensation ..................        2,737        7,107        9,453      20,641
      Impairment of fixed assets ...................................          550            -          550           -
      Corporate restructuring charges ..............................            -            -        3,666           -
                                                                         --------     --------     --------   ---------
           Total expenses ..........................................       28,438       61,472      103,158     183,515
                                                                         --------     --------     --------   ---------
Loss from operations ...............................................       (8,039)     (14,300)     (38,022)    (37,143)

Interest income, net ...............................................        1,472        2,244        5,001       5,212
Other income (expense), net ........................................            -         (118)           -         919
Impairment of cost-basis investment ................................            -            -       (2,500)          -
                                                                         --------     --------     --------   ---------

Net loss ...........................................................     $ (6,567)    $(12,174)    $(35,521)  $ (31,012)
                                                                         ========     ========     ========   =========

Basic and diluted net loss per share ...............................     $  (0.11)    $  (0.22)    $  (0.62)  $   (0.65)
                                                                         ========     ========     ========   =========

Shares used in computing basic and diluted net loss per share ......       57,346       55,159       57,042      47,522
                                                                         ========     ========     ========   =========

Comprehensive loss:
      Net loss .....................................................     $ (6,567)    $(12,174)    $ 35,521)  $ (31,012)
      Items of comprehensive income ................................           20          228          305          28
                                                                         --------     --------     --------   ---------
          Comprehensive loss .......................................     $ (6,547)    $(11,946)    $ 35,216)  $ (30,984)
                                                                         ========     ========     ========   =========
</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>
                                                                                        Nine Months Ended
                                                                                        -----------------
                                                                                          September 30,
                                                                                          -------------
                                                                                     2001              2000
                                                                                   ---------         ---------
<S>                                                                                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss ....................................................................   $ (35,521)        $ (31,012)
   Adjustments to reconcile net loss to net cash used
      in operating activities:
       Depreciation and amortization ...........................................      15,352            24,867
       Loss on disposal of fixed assets.........................................          --                71
       Impairment of cost-basis investment and long-lived assets ...............       4,095                --
       Non-cash compensation ...................................................         323               128
       Changes in assets and liabilities:
          Accounts receivable...................................................      25,579           (11,351)
          Other receivables and other current assets ...........................        (698)           (2,849)
          Other assets .........................................................       1,849            (1,145)
          Accounts payable .....................................................     (28,993)           (1,240)
          Accrued expenses .....................................................       3,038               903
          Deferred revenue .....................................................         101             1,955
                                                                                   ---------         ---------
       Net cash used in operating activities ...................................     (14,875)          (19,673)
                                                                                   ---------         ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment .........................................      (1,075)          (10,342)
   Sales (purchases) of marketable securities, net .............................      15,448          (104,055)
   Purchases of intangible assets ..............................................          --              (313)
                                                                                   ---------         ---------
       Net cash provided by (used in) investing activities .....................      14,373          (114,710)
                                                                                   ---------         ---------


CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds (payment) of notes payable .........................................      (1,500)            4,798
   Proceeds from issuance of common stock and exercises of
      common stock options, net ................................................         463           138,298
                                                                                   ---------         ---------
       Net cash (used in) provided by financing activities .....................      (1,037)          143,096
                                                                                   ---------         ---------
Net (decrease) increase in cash and cash equivalents ...........................      (1,539)            8,713
Cash and cash equivalents, beginning of period .................................      38,888            10,962
                                                                                   ---------         ---------
Cash and cash equivalents, end of period .......................................   $  37,349         $  19,675
                                                                                   =========         =========
</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
                               September 30, 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 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. As part of restructuring programs initiated during January 2001 and
May 2001, the Company terminated employees in international offices and expects
to complete the closure of international offices by December 31, 2001.

     Effective January 1, 2001, the Company established two operating divisions:
Avenue A and Atlas DMT. Avenue A is an interactive advertising agency that
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 provides the Atlas
Digital Marketing Suite, a digital marketing management system, 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 three and nine months ended September 30,
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
                               September 30, 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, including 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 exercise of common stock options and
warrants are antidilutive.

                                       7

<PAGE>

                                 AVENUE A, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2001
                (in thousands except share and per share amounts)
                                   (unaudited)

     Recent Accounting Pronouncements: In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" (effective
July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets"
(effective for the Company on January 1, 2002). SFAS No. 141 prohibits
pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but instead will
be subject to periodic impairment testing. The Company is in the process of
evaluating the financial statement impact of adoption of SFAS No. 142.

     On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (effective for the Company on
January 1, 2002). SFAS No. 144 addresses financial accounting and reporting for
the disposal of long-lived assets. The Company is in the process of evaluating
the financial statement impact of adoption of SFAS No. 144.

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                Nine Months Ended
                                                                     ------------------                -----------------
                                                                        September 30,                    September 30,
                                                                        -------------                    -------------
                                                                       2001             2000             2001              2000
                                                                   ------------     ------------     ------------     ------------
<S>                                                                <C>              <C>              <C>              <C>
Net Loss (numerator for basic and diluted): ....................   $     (6,567)    $    (12,174)    $    (35,521)    $    (31,012)
                                                                   ============     ============     ============     ============
Shares (denominator for basic and diluted): ....................     58,066,905       58,168,375       58,096,399       51,007,817
  Gross weighted average common shares outstanding Less:
     Weighted average common shares subject to repurchase ......        720,751        3,008,888        1,054,658        3,485,886
                                                                   ------------     ------------     ------------     ------------
Shares used in computation .....................................     57,346,154       55,159,487       57,041,741       47,521,931
                                                                   ============     ============     ============     ============
Basic and diluted net loss per share ...........................   $       (.11)    $       (.22)    $       (.62)    $       (.65)
                                                                   ============     ============     ============     ============
</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.

                                       8

<PAGE>

                                 AVENUE A, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2001
                (in thousands except share and per share amounts)
                                   (unaudited)

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. During the three and nine months
ended September 30, 2001, Avenue A generated revenue of $20,391 and $65,128 and
related operating income of $3,388 and $5,740, respectively, and Atlas DMT
generated revenue of $8 and an operating loss of $4,215 and $13,688,
respectively. 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 September 30, 2001.

6.   Corporate Restructuring and Impairment Charges

     Restructurings and related impairments

     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, all of which has been
paid as of September 30, 2001, and $400 related to existing lease agreements for
office space that is no longer in use and other liabilities for which there is a
contractual obligation, of which $298 has been paid as of September 30, 2001.
The remaining amounts are included in the accrued liabilities in the
accompanying condensed consolidated balance sheet.

     During May 2001, the Company initiated a cost reduction program that
resulted in the termination of approximately an additional 75 employees. The
Company recognized restructuring charges of $2,166, which included $1,877
relating to employee severance and benefits for terminated employees, of which
$1,670 had been paid as of September 30, 2001, and $115 related to existing
lease agreements for office space that is no longer in use and other liabilities
for which there is a contractual obligation, of which $42 has been paid as of
September 30, 2001. The remaining amounts are included in the accrued
liabilities in the accompanying condensed consolidated balance sheet. The
restructuring charge also includes the write-down to fair value of certain
impaired fixed assets of $174 pursuant to Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121).

     Impairment of cost-basis investment

     During the second quarter of 2001, the Company determined that its minority
investment in a private company was permanently impaired relative to its
carrying value. As a result, the Company recognized an impairment charge of $2.5
million, which is included as a component of nonoperating income (expense) in
the accompanying consolidated statements of operations for the nine months ended
September 30, 2001. Permanent impairment in the Company's cost-basis investment
was determined by examining the operations of the company and reviewing recent
valuations for the Company and comparable companies.

     Impairment of fixed assets

     During the third quarter of 2001, the Company disposed of excess fixed
assets that were no longer in service pursuant to SFAS 121. As a result, the
Company recognized an impairment charge of $550, which is included as a
component of operating expenses in the accompanying consolidated statements of
operations for the three and nine months ended September 30, 2001.

                                       9

<PAGE>

                                 AVENUE A, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2001
                (in thousands except share and per share amounts)
                                   (unaudited)

7.   Legal Proceedings

     The Company is currently the subject of three lawsuits concerning the
collection and use of Internet user information.

     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. Plaintiffs in two
separate suits -- Werber v. Avenue A, and Bowles v. Avenue A -- agreed to join
the Chance case as plaintiffs rather than pursue their own individual cases
against the Company. Accordingly, on or about May 29, 2001, plaintiffs filed a
First Amended Consolidated Class Action Complaint in the Chance case adding
Werber and Bowles as plaintiffs. 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) violation of
RCW section 9.73.030 et seq. (the Washington State Wiretap/Interception
statute), (5) common law trespass to personal property and conversion, (6)
common law invasion of privacy, (7) unjust enrichment, (8) violation of state
consumer protection and deceptive practices statutes, and (9) declaratory
judgment. On September 17, 2001, the Court granted the Company's motion for
summary judgment and entered judgment in the Company's favor. On October 15,
2001, plaintiffs filed a notice of appeal.

     In Werber 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 November 30, 2000 in the United States District
Court for the Western District of Washington. The district court ordered the
Werber case to be consolidated with the Chance case.

     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. On or about May 10, 2001, the
district court granted plaintiff's motion for voluntary dismissal of the case.

     In Lopez v. Avenue A, Inc., the plaintiff, on behalf of himself and all
        -----------------------
others similarly situated in the State of Texas, filed a class action complaint
against the Company on or about February 13, 2001, in the District Court of
Cameron County, Texas. The complaint contains the following claims relating to
the Company's collection and use of Internet user information: (1) common law
invasion of privacy, and (2) unjust enrichment. The plaintiff seeks declaratory
and injunctive relief as well as monetary damages and disgorgement of profits
that the Company has received in connection with the alleged illegal practices.
The case is currently pending in the district court.

     In Garcia v. Avenue A, Inc., the plaintiff, on behalf of herself and all
        ------------------------
others similarly situated in the State of California, filed a class action
complaint against Avenue A on or about October 9, 2001, in the Superior Court
for San Bernardino County, California. The complaint contains the following
claims relating to the Company's collection and use of Internet user
information: (1) invasion of privacy in violation of article I, section 1 of the
California Constitution, (2) common law invasion of privacy, (3) violation of
California Penal Code ss.ss. 631 et seq. (the California wiretapping and
eavesdropping statutes), (4) violation of California Business & Professions Code
ss.ss. 17200 et seq. (the California unfair competition statute), and (5) unjust
enrichment. The plaintiff seeks declaratory and injunctive relief as well as
monetary damages.

                                       10

<PAGE>

                                 AVENUE A, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2001
                (in thousands except share and per share amounts)
                                   (unaudited)

     The Company has been named as a defendant in five lawsuits filed in the
United States District Court for the Southern District of New York. The lawsuits
allege violations of federal securities laws in connection with disclosures
contained in the Company's prospectus dated February 28, 2000, for its initial
public offering of common stock. The complaints allege incorrect disclosure or
omissions in the Company's prospectus relating generally to commissions to be
earned by the underwriters and certain allegedly improper agreements between the
underwriters and certain purchasers of the Company's stock. They also allege
that the Securities and Exchange Commission and/or other regulatory authorities
are investigating underwriting practices similar to those alleged in the
complaints. The Company has no knowledge as to whether the Company or its
initial public offering is the subject of any such investigation.

     In Mermelstein v. Avenue A, Inc. et al., plaintiff filed a class action
        ------------------------------------
complaint against the Company on or about June 15, 2001, in the United States
District Court for the Southern District of New York (case no. 01-CV-5446).
Plaintiff filed the suit on behalf of herself and all others who acquired the
Company's common stock between February 28, 2000 and July 11, 2000, pursuant or
traceable to the Company's prospectus dated February 28, 2000. Plaintiff also
names as defendants Morgan Stanley Dean Witter, an underwriter of the Company's
initial public offering, Brian McAndrews, the Company's President and Chief
Executive Officer, Nicolas Hanauer, the Company's Chairman of the Board, and
Robert Littauer, the Company's former Chief Financial Officer. The complaint
contains the following purported claims against all defendants: (1) violation of
15 U.S.C. section 77k (section 11 of the Securities Act of 1933), (2) violation
of 15 U.S.C. section 771 (section 12 of the Securities Act of 1933), and (3)
violation of 15 U.S.C. section 78j(b) (section 10(b) of the Securities Exchange
Act of 1934) and 17 C.F.R. section 240.10b-5 (Securities and Exchange Commission
Rule 10b-5). The complaint contains the following purported claims against the
individual defendants alone: (1) violation of 15 U.S.C. section 77o (section 15
of the Securities Act of 1933), and (2) violation of 15 U.S.C. section 78t(a)
(section 20(a) of the Securities Exchange Act of 1934). Plaintiff seeks
rescission and monetary damages. Class certification has not been granted,
discovery has not yet commenced, and a trial date has not been set.

     In Bernstein v. Avenue A, Inc. et al., plaintiff filed a class action
        ----------------------------------
complaint against the Company on or about June 22, 2001, in the United States
District Court for the Southern District of New York (case no. 01-CV-5733).
Plaintiff filed the suit on behalf of herself and all others who acquired the
Company's common stock between February 28, 2000 and June 14, 2001, pursuant or
traceable to the Company's prospectus dated February 28, 2000. Plaintiff also
names as defendants Morgan Stanley Dean Witter, Brian McAndrews, Nicolas Hanauer
and Robert Littauer. The complaint contains one purported claim against all
defendants: violation of 15 U.S.C. section 77k (section 11 of the Securities Act
of 1933). The complaint contains the following purported claims against Morgan
Stanley Dean Witter alone: (1) violation of 15 U.S.C. section 77l (section 12 of
the Securities Act of 1933), and (2) violation of 15 U.S.C. section 78j(b)
(section 10(b) of the Securities Exchange Act of 1934) and 17 C.F.R. section
240.10b-5 (Securities and Exchange Commission Rule 10b-5). The complaint
contains the following purported claims against the individual defendants alone:
(1) violation of 15 U.S.C. section 77o (section 15 of the Securities Act of
1933), and (2) violation of 15 U.S.C. section 78t(a) (section 20(a) of the
Securities Exchange Act of 1934). Plaintiff seeks rescission and monetary
damages. Class certification has not been granted, discovery has not yet
commenced, and a trial date has not been set.

     In Gordon et al. v. Avenue A, Inc. et al., plaintiffs filed a class action
        --------------------------------------
complaint against the Company on or about June 21, 2001, in the United States
District Court for the Southern District of New York (case no. 01-CV-5736).
Plaintiffs filed the suit on behalf of themselves and all others who acquired
the Company's common stock between February 28, 2000 and December 6, 2000,
pursuant or traceable to the Company's prospectus dated February 28, 2000.
Plaintiffs also name as defendants Morgan Stanley & Co., Inc. and Salomon Smith

                                       11

<PAGE>

                                 AVENUE A, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2001
                (in thousands except share and per share amounts)
                                   (unaudited)

Barney, Inc., underwriters of the Company's initial public offering, and Brian
McAndrews, Nicolas Hanauer and Robert Littauer. The complaint contains one
purported claim against all defendants: violation of 15 U.S.C. section 77k
(section 11 of the Securities Act of 1933). The complaint contains the following
purported claims against the underwriter defendants alone: (1) violation of 15
U.S.C. section 77l (section 12 of the Securities Act of 1933), and (2) violation
of 15 U.S.C. section 78j(b) (section 10(b) of the Securities Exchange Act of
1934) and 17 C.F.R. section 240.10b-5 (Securities and Exchange Commission Rule
10b-5). The complaint contains one purported claim against the individual
defendants alone: violation of 15 U.S.C. section 77o (section 15 of the
Securities Act of 1933). Plaintiffs seek rescission and monetary damages. Class
certification has not been granted, discovery has not yet commenced, and a trial
date has not been set.

     In Tonningsen v. Avenue A, Inc. et al., plaintiff filed a class action
        -----------------------------------
against the Company on or about July 13, 2001, in the United States District
Court for the Southern District of New York (case no. 01-CV-6350). Plaintiff
filed suit on behalf of herself and all others who acquired the Company's common
stock between February 28, 2000 and December 6, 2000, pursuant or traceable to
the Company's prospectus dated February 28, 2000. Plaintiff also names as
defendants Dain Rauscher, Inc., Morgan Stanley Dean Witter & Co., Inc., Thomas
Weisel Partners LLC, and Salomon Smith Barney, Inc., identified in the complaint
as the underwriter defendants, and Brian McAndrews, Nicolas Hanauer, Robert
Littauer, identified in the complaint as the individual defendants. The
complaint contains the following purported claims against all defendants: (1)
violation of 15 U.S.C.ss.77k (section 11 of the Securities Act of 1933); (2)
violation of 15 U.S.C.ss.77j(b) (section 10(b) of the Securities Exchange Act of
1934) and 17 C.F.R.ss.240.10b-5 (Securities and Exchange Commission Rule 10b-5).
The complaint contains the following purported claims against the underwriter
defendants alone: (1) violation of 17 C.F.R.ss.240.10b-3 (Securities and
Exchange Commission Rule 10b-3); and (2) violation of 15 U.S.C.ss.77l(2)
(section 12(2) of the Securities Act of 1933). The complaint contains the
following purported claims against the individual defendants alone: (1)
violation of 15 U.S.C.ss.77o (section 15 of the Securities Act of 1933); and (2)
violation of 15 U.S.C.ss. 78t(a) (section 20 of the Securities Exchange Act of
1934). Plaintiff seeks monetary damages. Class certification has not been
granted, discovery has not yet commenced, and a trial date has not been set.

     In Panagiota v. Avenue A, Inc., et al., plaintiff filed a class action
        -----------------------------------
against the Company on or about July 30, 2001, in the United States District
Court for the Southern District of New York (case no. 01-CIV-6998). Plaintiff
filed suit on behalf of himself and all others who acquired the Company's common
stock between February 28, 2000 and December 6, 2000, pursuant or traceable to
the Company's prospectus dated February 28, 2000. Plaintiff also names as
defendants Morgan Stanley & Co., Incorporated and Salomon Smith Barney, Inc.,
identified in the complaint as the underwriter defendants, and Brian McAndrews,
Nicolas Hanauer, and Robert Littauer, identified in the complaint as the
individual defendants. The complaint contains one purported claim against all
defendants: violation of 15 U.S.C.ss.77k (section 11 of the Securities Act of
1933). The complaint contains the following purported claims against the
underwriter defendants alone: (1) violation of 15 U.S.C.ss.77l(2)(a) (section
12(2)(a) of the Securities Act of 1933); (2) violation of 15 U.S.C.ss.77j(b)
(section 10(b) of the Securities Exchange Act of 1934) and 17 C.F.R.ss.240.10b-5
(Securities and Exchange Commission Rule 10b-5). The complaint contains one
purported claim against the individual defendants alone: violation of 15
U.S.C.ss.77o (section 15 of the Securities Act of 1933). Plaintiff seeks
rescission and monetary damages. Class certification has not been granted,
discovery has not yet commenced, and a trial date has not been set.

     The foregoing cases are among numerous similar cases filed in the United
States District Court for the Southern District of New York against underwriters
and other issuers of stock in initial public offerings. The Court has
coordinated the cases under a single case number for pretrial proceedings.

                                       12

<PAGE>

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

        The following discussion and analysis should be read in conjunction with
the financial statements and related notes thereto included elsewhere in this
quarterly report on Form 10-Q. The discussion in this report contains
forward-looking statements that involve risks and uncertainties, such as our
objectives, expectations and intentions. Our actual results could differ
materially from results that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, 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. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made in this report and
in our other reports filed with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and factors that may affect
our business, prospects and results of operations.

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 services that harness 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 provide the Atlas Digital Marketing Suite, a digital marketing
management system, to online and traditional advertising agencies 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. All such revenue is recognized
over the period that the

                                       13

<PAGE>

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.

Results of Operations

   Comparison of the Three and Nine Months Ended September 30, 2001 and
September 30, 2000

     The following table presents, in dollars and as a percentage of revenue,
unaudited statements of operations data for the three and nine months ended
September 30, 2001 and September 30, 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 September 30,       Nine Months Ended September 30,
                                                   -----------------------------------    -----------------------------------
                                                          2001                2000               2001               2000
                                                          ----                ----               ----               ----
                                               (in thousands except percentage amounts)  (in thousands except percentage amounts)
<S>                                              <C>         <C>     <C>         <C>     <C>        <C>      <C>         <C>
Revenue .....................................    $ 20,399    100.0%  $ 47,172    100.0%  $ 65,136   100.0%   $146,372    100.0%
Expenses:
    Cost of revenue .........................      13,609     66.7%    37,372     79.2%    46,889    72.0%    117,927     80.6%
    Client support ..........................       2,038     10.0%     4,085      8.7%     8,078    12.4%     11,268      7.7%
    Product development .....................       2,919     14.3%     3,286      7.0%     9,922    15.2%      8,212      5.6%
    Selling, general and administrative .....       4,650     22.8%     7,964     16.9%    18,705    28.7%     21,101     14.4%
    Depreciation and amortization of
        property and equipment ..............       1,431      7.0%     1,155      2.4%     4,392     6.7%      2,856      2.0%
    Amortization of intangible assets .......         504      2.5%       503      1.1%     1,503     2.3%      1,510      1.0%
    Amortization of deferred stock
        compensation ........................       2,737     13.4%     7,107     15.1%     9,453    14.5%     20,641     14.1%
    Impairment of fixed assets ..............         550      2.7%        --       --%       550     0.8%         --       --%
    Corporate restructuring charges .........          --       --%        --       --%     3,666     5.6%         --       --%
                                                  -------    -----   --------    -----   --------   -----    --------    -----
        Total expenses ......................      28,438    139.4%    61,472    130.3%   103,158   158.4%    183,515    125.4%
                                                  -------    -----   --------    -----   --------   -----    --------    -----
Loss from operations ........................      (8,039)   (39.4)%  (14,300)   (30.3)%  (38,022)  (58.4)%   (37,143)   (25.4)%
Interest income, net ........................       1,472      7.2%     2,244      4.8%     5,001     7.7%      5,212      3.6%
Other income (expense), net .................          --       --%      (118)    (0.3)%       --      --%        919      0.6%
Impairment of cost-basis investment .........          --       --%        --       --%    (2,500)   (3.8)%        --       --%
                                                  -------    -----   --------    -----   --------   -----    --------    -----
Net loss ....................................     $(6,567)   (32.2)% $(12,174)   (25.8)% $(35,521)  (54.5)%  $(31,012)   (21.2)%
                                                  =======    =====   ========    =====   ========   =====    ========    =====
</TABLE>

     Revenue. Revenue decreased to $20.4 million for the three months ended
September 30, 2001 from $47.2 million for the three months ended September 30,
2000. Revenue decreased to $65.1 million for the nine months ended September 30,
2001 from $146.4 million for the nine months ended September 30, 2000. The
decreases in revenue were primarily due to two factors. First, revenue
contributions from exclusively Internet-based clients has declined due to the
downturn in the Internet sector that has caused many such companies to go out of
business or to reduce advertising spending to conserve cash. Second, the general
softness in the economy has caused many advertisers to reduce advertising
spending. We expect that our revenue during the fourth quarter of 2001 will
remain relatively flat or decrease slightly compared to the third quarter 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
$13.6 million, or 66.7% of revenue, for the three months ended September 30,
2001 from $37.4 million, or 79.2% of revenue, for the three months ended
September 30, 2000. Cost of revenue decreased to $46.9 million, or 72.0% of
revenue, for the nine months ended September 30, 2001 from $117.9 million, or
80.6% of revenue, for the nine months ended

                                       14

<PAGE>

September 30, 2000. The dollar decreases in cost of revenue were primarily due
to decreases in the volume of advertising space we purchased. The percentage
decreases in cost of revenue were primarily due to increased revenue
contribution from higher margin products such as the Strategic Partnership
Program and consulting, improved pricing in our core services, and an increase
in revenue generated under net method contracts. We expect that our cost of
revenue as a percentage of sales will remain relatively flat for the remainder
of 2001.

     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 functions such
as the Strategic Partnership Program and consulting. Client support expenses
were $2.0 million, or 10.0% of revenue, for the three months ended September 30,
2001 and $4.1 million, or 8.7% of revenue for the three months ended September
30, 2000. Client support expenses were $8.1 million, or 12.4% of revenue, for
the nine months ended September 30, 2001 and $11.3 million, or 7.7%, of revenue
for the nine months ended September 30, 2000. The dollar decreases in client
support expenses were primarily due to reductions in workforce completed during
the year. The increases in client support expenses as a percentage of revenue
were primarily due to our revenue decreasing at a faster rate than our expenses.
We expect that our client support expenses will remain relatively flat for the
remainder of 2001.

     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 in preparing our Atlas(TM) Digital
Marketing Suite for sale to external clients. Product development expenses
decreased to $2.9 million, or 14.3% of revenue, for the three months ended
September 30, 2001 from $3.3 million, or 7.0% of revenue, for the three months
ended September 30, 2000. Product development expenses increased to $9.9
million, or 15.2% of revenue, for the nine months ended September 30, 2001 from
$8.2 million, or 5.6% of revenue, for the nine months ended September 30, 2000.
The slight dollar decrease in product development expenses for the three months
ended September 30, 2001 was due to the decrease in professional services
incurred in preparing our Atlas Digital Marketing Suite. The increase in product
development expenses for the nine months ended September 30, 2001 was primarily
due to the increases in the number of personnel used in development to prepare
our Atlas Digital Marketing Suite partially offset by reductions in workforce
completed during the year. The increases in product development expenses as a
percentage of revenue were primarily due to our revenue decreasing at a faster
rate than our expenses. We expect that our product development expenses will
remain relatively flat for the remainder of 2001.

     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 were $4.6
million, or 22.8% of revenue, for the three months ended September 30, 2001 and
$8.0 million, or 16.9% of revenue, for the three months ended September 30,
2000. Selling, general and administrative expenses were $18.7 million, or 28.7%
of revenue, for the nine months ended September 30, 2001 and $21.1 million, or
14.4% of revenue, for the nine months ended September 30, 2000. The dollar
decreases in selling, general and administrative expenses for the three and nine
months ended September 30, 2001 were primarily due to a decrease in personnel
expenses as a result of the reductions in workforce during January 2001 and May
2001 partially offset by increases in legal and rent expenses. The increases in
selling, general and administrative expenses as a percentage of revenue were
primarily due to our revenue decreasing at a faster rate than our expenses. We
expect that our selling, general, and administrative expenses will remain
relatively flat for the remainder of 2001.

     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

                                       15

<PAGE>

and equipment increased to $1.4 million, or 7.0% of revenue, for the three
months ended September 30, 2001 from $1.2 million, or 2.4% of revenue, for the
three months ended September 30, 2000. Depreciation and amortization of property
and equipment increased to $4.4 million, or 6.7% of revenue, for the nine months
ended September 30, 2001 from $2.9 million, or 2.0% of revenue, for the nine
months ended September 30, 2000. The dollar increases were primarily due to
purchases of assets during 2000 and 2001. The increases in depreciation and
amortization of property and equipment as a percentage of revenue were primarily
due to our revenue decreasing at a faster rate than our expenses.

     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
$504,000, or 2.5% of revenue, and $503,000, or 1.1% of revenue, for the three
months ended September 30, 2001 and 2000, respectively. Amortization of
intangible assets was $1.5 million, or 2.3% of revenue, and $1.5 million, or
1.0% of revenue, for the nine months ended September 30, 2001 and 2000,
respectively. The increases in amortization of intangible assets as a percentage
of revenue were 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 $2.7 million, or 13.4% of revenue,
for the three months ended September 30, 2001 from $7.1 million, or 15.1% of
revenue, for the three months ended September 30, 2000. Amortization of deferred
stock compensation decreased to $9.5 million, or 14.5% of revenue, for the nine
months ended September 30, 2001 from $20.6 million, or 14.1% of revenue, for the
nine months ended September 30, 2000. The dollar decreases were primarily
related to the decrease in deferred stock compensation due to the cancellation
of unvested stock options as a result of 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.

     Impairment of fixed assets. Impairment of fixed assets consists of the loss
from the disposition of excess assets that are no longer in use by the Company
pursuant to SFAS 121. Impairment charges related to fixed assets for the three
and nine months ended September 30, 2001 were $550,000. There were no such
charges for the corresponding periods of the previous fiscal year.

     Corporate restructuring charges. Corporate restructuring charges consist of
severance costs and other expenses associated with our cost reduction programs
initiated during January 2001 and May 2001 when we terminated approximately 70
and 75 employees, respectively. Corporate restructuring charges for the nine
months ended September 30, 2001 were $3.7 million. For the nine months ended
September 30, 2001, corporate restructuring charges included $3.0 million
relating to employee severance and benefits for terminated employees and
$515,000 related to existing lease agreements for office space that is no longer
in use and other liabilities for which there are contractual obligations.
Corporate restructuring charges for the nine months ended September 30, 2001
also included $174,000 related to fixed asset impairments recorded pursuant to
SFAS No. 121.

     Interest income, net. Net interest income consists of earnings on our cash
and cash equivalents. Net interest income decreased to $1.4 million, or 7.2% of
revenue, for the three months ended September 30, 2001 from $2.2 million, or
4.8% of revenue, for the three months ended September 30, 2000. Net interest
income decreased to $5.0 million, or 7.7% of revenue, for the nine months ended
September 30, 2001 from $5.2 million, or 3.6% of revenue, for the nine months
ended September 30, 2000. The dollar decreases in net interest income were due
to lower invested balances as a result of cash used. The percentage increases in
net interest income were due to the decreases in revenue.

                                       16

<PAGE>

        Impairment of cost-basis investment. Impairment of cost-basis investment
consists of an other than temporary write down of $2.5 million of a minority
investment in a private company that was recorded during the second quarter of
2001.

     Our quarterly and annual revenue, expenses and operating results have
fluctuated in the past and may 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 good
indications 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 September 30, 2001, we had cash and cash equivalents of $37.3 million
and short-term investments of $80.0 million compared to $38.9 million in cash
and cash equivalents and $95.3 million in short-term investments at December 31,
2000. We have a $6.0 million equipment term loan facility with a bank which was
fully utilized as of September 30, 2001 and December 31, 2000.

     Cash used in operating activities was $14.9 million and $19.7 million for
the nine months ended September 30, 2001 and 2000, respectively.

     Cash provided by investing activities was $14.4 million for the nine months
ended September 30, 2001 and primarily related to sales of marketable securities
offset by purchases of equipment and software. Cash used in investing activities
was $114.7 million for the nine months ended September 30, 2000 and primarily
related to purchases of marketable securities offset by purchases of computer
equipment to expand our ad serving capacity and to equip employees hired during
that period.

     Cash used in financing activities was $1.0 million for the nine months
ended September 30, 2001 and primarily related to the payments of notes payable
during the nine months ended September 30, 2001. Cash provided by financing
activities was $143.1 million for the nine months ended September 30, 2000 and
primarily related to the net proceeds from our initial public offering of common
stock in February 2000.

     As of September 30, 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 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.

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142,
"Goodwill and Other Intangible Assets" (effective for us on January 1, 2002).
SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS
No. 142 specifies that goodwill and some intangible assets will no longer be
amortized but instead will be subject to

                                       17

<PAGE>

periodic impairment testing. We are currently in the process of evaluating the
financial statement impact of adoption of SFAS No. 142.

     On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (effective for the Company on
January 1, 2002). SFAS No. 144 addresses financial accounting and reporting for
the disposal of long-lived assets. We are currently in the process of evaluating
the financial statement impact of adoption of SFAS No. 144.

                                       18

<PAGE>

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 $35.5
million for the nine months ended September 30, 2001. As of September 30, 2001,
our accumulated deficit was $93.7 million. 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 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.

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<PAGE>

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

 .    fluctuating demand for our advertising services and technologies 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. 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 business may be seriously harmed by third-party litigation 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

                                       20

<PAGE>

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. 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,
Internet browser software upgrades may result in limitations on the use of
cookies or action tags. Furthermore, 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
to 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.

         Our business may be seriously harmed by litigation alleging violations
         of federal securities laws

         We, some of our officers and directors, a former officer, and some of
the underwriters of our initial public offering of common stock in February 2000
are defendants in pending class action lawsuits that allege violations of
federal securities laws in connection with our initial public offering. The
claims in the lawsuits include, among other things, allegations of
misrepresentations or failures to disclose alleged facts relating to the
defendant underwriters' compensation and commissions in connection with our
initial public offering and alleged agreements between the underwriters and
their customers relating to further purchases of our stock. 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 result in the payment by us of substantial damages and the
rescission of the sale of shares in the initial public offering, and may
otherwise seriously harm our business. See "Legal Proceedings."

                                       21

<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 would 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, license or coexistence 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

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<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 challenges or trademark infringement claims by
third parties as a result of our use of the name "Avenue A." 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.

         Failure of our services to perform properly or improper use of our
         services by our clients could give rise to legal claims against us or
         damage our reputation

         If our technology-based services fail to perform properly for our
clients, we may be exposed to liability to our clients or to their customers for
whom our clients used our services. In addition, our clients may use our
technology-based services in a manner that fails to comply with applicable laws,
including but not limited to laws and regulations surrounding the Internet. For
example, because our services may be used by clients to transmit information
over the Internet, our services might be used by clients to transmit information
that violates laws or regulations, harmful applications, negative messages,
unauthorized reproduction of copyrighted material, inaccurate data or computer
viruses to end-users in the course of delivery. Any claims made against us
arising in connection with our clients' use of our services, regardless of their
outcome, may cause us to incur significant expenses and divert the attention of
our management and key personnel from business operations. In addition, such
claims may require us to pay substantial damages, modify or discontinue some of
our services and otherwise seriously harm our business and damage 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
personnel 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

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<PAGE>

         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. We also compete with
interactive advertising agencies, enabling online advertising technology
providers, advertising networks, targeted email service providers and
traditional advertising agencies that perform Internet advertising and marketing
as part of their services to clients.

         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 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 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

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<PAGE>

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 the Pacific Northwest
may experience power shortages or outages and has experienced 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
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.

         Our operations may be adversely affected by the economic impact of
         terrorist attacks and potential terrorist activities

     The success of our business depends on the overall demand for our services
and the growth of the Internet advertising industry. Advertising in general is
sensitive to general economic conditions and consumer confidence. The terrorist
attacks against the United States on September 11, 2001 and other recent
terrorist activities have created significant economic and political
uncertainties in an already weakened national economy. These increased
uncertainties may have an adverse effect on the advertising industry, result in
the reduction of our clients' advertising budgets, weaken demand for our
services and result in a decrease in our revenues. In addition, we may
experience delays in receiving payments from clients affected by the terrorist
attacks or potential terrorist activities.

         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:

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<PAGE>

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

 .    ineffectiveness or incompatibility of acquired technologies or services;

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

 .    unavailability of favorable financing for future acquisitions;

 .    potential loss of key employees of acquired businesses;

 .    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.

         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

                                       26

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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
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.

         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 in the
over-the-counter market which is viewed by many investors as a less liquid
marketplace. 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 56-week period ended
October 26, 2001, the closing price of our common stock ranged from $0.68 to
$8.25 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;

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<PAGE>

 .  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
are currently the target of several securities class action lawsuits and may be
the target of additional lawsuits in the future. This litigation and any future
securities litigation against us could result in substantial costs and divert
our management's attention from business concerns, 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 three lawsuits concerning our collection
and use of Internet user information.

     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. Plaintiffs in two separate suits
-- Werber v. Avenue A, and Bowles v. Avenue A -- agreed to join the Chance case
   ------------------      ------------------
as plaintiffs rather than pursue their own individual cases against us.
Accordingly, on or about May 29, 2001, plaintiffs filed a First Amended
Consolidated Class Action Complaint in the Chance case adding Werber and Bowles
as plaintiffs. 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) violation of RCW section 9.73.030 et seq. (the
Washington State Wiretap/Interception statute), (5) common law trespass to
personal property and conversion, (6) common law invasion of privacy, (7) unjust
enrichment, (8) violation of state consumer protection and deceptive practices
statutes, and (9) declaratory judgment. On September 17, 2001, the Court granted
our motion for summary judgment and entered judgment in our favor. On October
15, 2001, plaintiffs filed a notice of appeal.

     In Werber 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 November 30, 2000 in the United States District Court for
the Western District of Washington. The district court ordered the Werber case
to be consolidated with the Chance case.

     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. On or about May 10, 2001, the district court
granted plaintiff's motion for voluntary dismissal of the case.

     In Lopez v. Avenue A, Inc., the plaintiff, on behalf of himself and all
        -----------------------
others similarly situated in the State of Texas, filed a class action complaint
against us on or about February 13, 2001, in the District Court of Cameron
County, Texas. The complaint contains the following claims relating to our
collection and use of Internet user information: (1) common law invasion of
privacy, and (2) unjust enrichment. The plaintiff seeks 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. The case
is currently pending in the district court.

     In Garcia v. Avenue A, Inc., the plaintiff, on behalf of herself and all
        ------------------------
others similarly situated in the State of California, filed a class action
complaint against us on or about October 9, 2001, in the Superior Court for San
Bernardino County, California. The complaint contains the following claims
relating to our collection and use of Internet user information: (1) invasion of
privacy in violation of article I, section 1 of the California

                                       29

<PAGE>

Constitution, (2) common law invasion of privacy, (3) violation of California
Penal Code (S) (S) 631 et seq. (the California wiretapping and eavesdropping
statutes), (4) violation of California Business & Professions Code (S) (S) 17200
et seq. (the California unfair competition statute), and (5) unjust enrichment.
The plaintiff seeks declaratory and injunctive relief as well as monetary
damages.

     We have been named as a defendant in five lawsuits filed in the United
States District Court of the Southern District of New York. The lawsuits allege
violations of federal securities laws in connection with disclosures contained
in our prospectus dated February 28, 2000, for our initial public offering of
common stock. The complaints allege incorrect disclosure or omissions in our
prospectus relating generally to commissions to be earned by the underwriters
and certain allegedly improper agreements between the underwriters and certain
purchasers of our stock. They also allege that the Securities and Exchange
Commission and/or other regulatory authorities are investigating underwriting
practices similar to those alleged in the complaints. We have no knowledge as to
whether Avenue A or our initial public offering is the subject of any such
investigation.

     In Mermelstein v. Avenue A, Inc. et al., plaintiff filed a class action
        ------------------------------------
complaint against us on or about June 15, 2001, in the United States District
Court for the Southern District of New York (case no. 01-CV-5446). Plaintiff
filed the suit on behalf of herself and all others who acquired our common stock
between February 28, 2000 and July 11, 2000, pursuant or traceable to our
prospectus dated February 28, 2000. Plaintiff also names as defendants Morgan
Stanley Dean Witter, an underwriter of our initial public offering, Brian
McAndrews, our President and Chief Executive Officer, Nicolas Hanauer, our
Chairman of the Board, and Robert Littauer, our former Chief Financial Officer.
The complaint contains the following purported claims against all defendants:
(1) violation of 15 U.S.C. section 77k (section 11 of the Securities Act of
1933), (2) violation of 15 U.S.C. section 771 (section 12 of the Securities Act
of 1933), and (3) violation of 15 U.S.C. section 78j(b) (section 10(b) of the
Securities Exchange Act of 1934) and 17 C.F.R. section 240.10b-5 (Securities and
Exchange Commission Rule 10b-5). The complaint contains the following purported
claims against the individual defendants alone: (1) violation of 15 U.S.C.
section 77o (section 15 of the Securities Act of 1933), and (2) violation of 15
U.S.C. section 78t(a) (section 20(a) of the Securities Exchange Act of 1934).
Plaintiff seeks rescission and monetary damages. Class certification has not
been granted, discovery has not yet commenced, and a trial date has not been
set.

     In Bernstein v. Avenue A, Inc. et al., plaintiff filed a class action
        ----------------------------------
complaint against us on or about June 22, 2001, in the United States District
Court for the Southern District of New York (case no. 01-CV-5733). Plaintiff
filed the suit on behalf of herself and all others who acquired our common stock
between February 28, 2000 and June 14, 2001, pursuant or traceable to our
prospectus dated February 28, 2000. Plaintiff also names as defendants Morgan
Stanley Dean Witter, Brian McAndrews, Nicolas Hanauer and Robert Littauer. The
complaint contains one purported claim against all defendants: violation of 15
U.S.C. section 77k (section 11 of the Securities Act of 1933). The complaint
contains the following purported claims against Morgan Stanley Dean Witter
alone: (1) violation of 15 U.S.C. section 77l (section 12 of the Securities Act
of 1933), and (2) violation of 15 U.S.C. section 78j(b) (section 10(b) of the
Securities Exchange Act of 1934) and 17 C.F.R. section 240.10b-5 (Securities and
Exchange Commission Rule 10b-5). The complaint contains the following purported
claims against the individual defendants alone: (1) violation of 15 U.S.C.
section 77o (section 15 of the Securities Act of 1933), and (2) violation of 15
U.S.C. section 78t(a) (section 20(a) of the Securities Exchange Act of 1934).
Plaintiff seeks rescission and monetary damages. Class certification has not
been granted, discovery has not yet commenced, and a trial date has not been
set.

     In Gordon et al. v. Avenue A, Inc. et al., plaintiffs filed a class action
        --------------------------------------
complaint against us on or about June 21, 2001, in the United States District
Court for the Southern District of New York (case no. 01-CV-5736). Plaintiffs
filed the suit on behalf of themselves and all others who acquired our common
stock between February 28, 2000 and December 6, 2000, pursuant or traceable to
our prospectus dated February 28, 2000. Plaintiffs also name as defendants
Morgan Stanley & Co., Inc. and Salomon Smith Barney, Inc., underwriters of our
initial public offering, and Brian McAndrews, Nicolas Hanauer and Robert
Littauer. The complaint contains one purported claim against all defendants:
violation of 15 U.S.C. section 77k (section 11 of the Securities Act of 1933).
The complaint contains the following purported claims against the underwriter
defendants alone: (1) violation of 15 U.S.C. section 77l (section 12 of the
Securities Act of 1933), and (2)

                                       30

<PAGE>

violation of 15 U.S.C. section 78j(b) (section 10(b) of the Securities Exchange
Act of 1934) and 17 C.F.R. section 240.10b-5 (Securities and Exchange Commission
Rule 10b-5). The complaint contains one purported claim against the individual
defendants alone: violation of 15 U.S.C. section 77o (section 15 of the
Securities Act of 1933). Plaintiffs seek rescission and monetary damages. Class
certification has not been granted, discovery has not yet commenced, and a trial
date has not been set.

     In Tonningsen v. Avenue A, Inc. et al., plaintiff filed a class action
        -----------------------------------
against us on or about July 13, 2001, in the United States District Court for
the Southern District of New York (case no. 01-CV-6350). Plaintiff filed suit on
behalf of herself and all others who acquired our common stock between February
28, 2000 and December 6, 2000, pursuant or traceable to our prospectus dated
February 28, 2000. Plaintiff also names as defendants Dain Rauscher, Inc.,
Morgan Stanley Dean Witter & Co., Inc., Thomas Weisel Partners LLC, and Salomon
Smith Barney, Inc., identified in the complaint as the underwriter defendants,
and Brian McAndrews, Nicolas Hanauer, Robert Littauer, identified in the
complaint as the individual defendants. The complaint contains the following
purported claims against all defendants: (1) violation of 15 U.S.C(S)77k
(section 11 of the Securities Act of 1933); (2) violation of 15 U.S.C(S)77j(b)
(section 10(b) of the Securities Exchange Act of 1934) and 17 C.F.R(S)240.10b-5
(Securities and Exchange Commission Rule 10b-5). The complaint contains the
following purported claims against the underwriter defendants alone: (1)
violation of 17 C.F.R(S)240.10b-3 (Securities and Exchange Commission Rule
10b-3); and (2) violation of 15 U.S.C(S)77l(2) (section 12(2) of the Securities
Act of 1933). The complaint contains the following purported claims against the
individual defendants alone: (1) violation of 15 U.S.C(S)77o (section 15 of the
Securities Act of 1933); and (2) violation of 15 U.S.C(S)78t(a) (section 20 of
the Securities Exchange Act of 1934). Plaintiff seeks monetary damages. Class
certification has not been granted, discovery has not yet commenced, and a trial
date has not been set.

     In Panagiota v. Avenue A, Inc., et al., plaintiff filed a class action
        -----------------------------------
against us on or about July 30, 2001, in the United States District Court for
the Southern District of New York (case no. 01-CIV-6998). Plaintiff filed suit
on behalf of himself and all others who acquired our common stock between
February 28, 2000 and December 6, 2000, pursuant or traceable to our prospectus
dated February 28, 2000. Plaintiff also names as defendants Morgan Stanley &
Co., Incorporated and Salomon Smith Barney, Inc., identified in the complaint as
the underwriter defendants, and Brian McAndrews, Nicolas Hanauer, and Robert
Littauer, identified in the complaint as the individual defendants. The
complaint contains one purported claim against all defendants: violation of 15
U.S.C(S)77k (section 11 of the Securities Act of 1933). The complaint contains
the following purported claims against the underwriter defendants alone: (1)
violation of 15 U.S.C(S)77l(2)(a) (section 12(2)(a) of the Securities Act of
1933); (2) violation of 15 U.S.C(S)77j(b) (section 10(b) of the Securities
Exchange Act of 1934) and 17 C.F.R(S)240.10b-5 (Securities and Exchange
Commission Rule 10b-5). The complaint contains one purported claim against the
individual defendants alone: violation of 15 U.S.C.(S) 77o (section 15 of the
Securities Act of 1933). Plaintiff seeks rescission and monetary damages. Class
certification has not been granted, discovery has not yet commenced, and a trial
date has not been set.


     The foregoing cases are among numerous similar cases filed in the United
States District Court for the Southern District of New York against underwriters
and other issuers of stock in initial public offerings. The Court has
coordinated the cases under a single case number for pretrial proceedings.

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

                                       31

<PAGE>

direct or indirect payments to others and not payments to our directors or
officers (or their associates) or to our affiliates or 10% shareholders.

   As of September 30, 2001, we have used approximately $15.1 million of the net
proceeds of the public offering primarily for general corporate purposes,
including working capital and capital expenditures. The remaining proceeds have
been placed 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

   (a) Exhibits Requirement by Item 601 of Regulation S-K

       10.1  Space and Service Lease between PowerSpace & Services, Inc. and
             Atlas-DMT, a division of Avenue A, Inc., dated October 2, 2001.

   (b) Reports on Form 8-K

   On July 3, 2001, we filed a report on Form 8-K which announced that several
securities class action suits had been filed against us, certain of our current
officers and directors and a former officer, and some of the underwriters in our
February 2000 initial public offering.

                                       32

<PAGE>

                                   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 November 13, 2001.

                                     AVENUE A, INC.



                                     By:        /S/ MICHAEL VERNON
                                        --------------------------------------
                                                    Michael Vernon
                                                Chief Financial Officer
                                           (Authorized Officer and Principal
                                                  Financial Officer)

<PAGE>

                                INDEX TO EXHIBITS

Exhibit
-------
Number                             Description
------  ------------------------------------------------------------------------

  10.1  Space and Service Lease between PowerSpace & Services, Inc. and
         Atlas-DMT, a division of Avenue A, Inc., dated October 2, 2001