<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 June 30, 2000

                                       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 July
31, 2000 was 58,074,640.
===============================================================================
<PAGE>

                                 AVENUE A, INC.

                                   FORM 10-Q

                      FOR THE QUARTER ENDED JUNE 30, 2000

                               TABLE OF CONTENTS

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


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

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

Item 3.       Quantitative and Qualitative Disclosures About Market Risk.....................................     23

                                                   PART II.   OTHER INFORMATION

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

Item 2.       Changes in Securities and Use of Proceeds......................................................     24

Item 6.       Exhibits and Reports on Form 8-K...............................................................     24
</TABLE>
                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  June 30,            December 31,
                                                                    2000                 1999
                                                              ---------------        -------------
               Assets                                           (unaudited)
               ------
<S>                                                           <C>                  <C>
Current assets:
   Cash and cash equivalents                                  $        48,224      $        10,962
   Short-term investments                                              90,862               11,803
   Accounts receivable, net of allowance                               39,378               28,295
   Other receivable                                                     1,559                  183
   Prepaid expenses and other current assets                              723                  153
                                                              ---------------      ---------------
Total current assets                                                  180,746               51,396

Property and equipment, net                                            12,420                4,625
Intangible assets, net                                                  4,365                5,221
Other assets                                                              782                  849
                                                              ----------------     ----------------

Total assets                                                  $       198,313      $        62,091
                                                              ================     ================

              Liabilities and Shareholders' Equity
              ------------------------------------

Current liabilities:
   Accounts payable                                           $        38,358      $        36,075
   Accrued expenses                                                     3,457                3,066
   Notes payable, current portion                                         337                  303
   Deferred revenue                                                     2,020                   20
                                                              ----------------     ----------------
Total current liabilities                                              44,172               39,464

Notes payable, less current portion                                       517                  683
                                                              ----------------     ----------------
Total liabilities                                                      44,689               40,147
                                                              ----------------     ----------------

Shareholders' equity:
   Convertible preferred stock $0.01 par value
      Authorized 37,500 shares
         Outstanding 0 and 16,416 shares                                    -                  164
   Common stock, $0.01 par value
      Authorized 200,000 shares
         Outstanding 58,105 and 25,121                                    581                  251
   Paid-in capital                                                    226,350               60,447
   Deferred stock compensation                                        (38,021)             (22,670)
   Subscription receivable                                               (965)                (965)
   Accumulated deficit                                                (34,098)             (15,260)
   Accumulated other comprehensive loss                                  (223)                 (23)
                                                              ----------------     ----------------
Total shareholders' equity                                            153,624               21,944
                                                              ----------------     ----------------
Total liabilities and shareholders' equity                    $       198,313      $        62,091
                                                              ================     ================
</TABLE>

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



<PAGE>


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


<TABLE>
<CAPTION>
                                                                     Three Months Ended                 Six Months Ended
                                                                          June 30,                           June 30,
                                                                 ==========================        ==========================
                                                                    2000            1999              2000            1999
                                                                 ----------      ----------        ----------      ----------
<S>                                                              <C>             <C>               <C>             <C>

Revenue                                                          $   52,425      $   11,490        $   99,200      $   13,497

Expenses:
  Cost of revenue                                                    42,039           9,498            80,555          11,264
  Client Services                                                     3,808             785             7,135           1,245
  Technology and analytics                                            4,127             530             7,102           1,028
  Selling, general, and administrative                                6,392           1,929            11,009           3,002
  Depreciation and amortization of property and equipment             1,092             135             1,700             249
  Amortization of intangible assets                                     497             -               1,007             -
  Amortization of deferred stock compensation                         7,344               3            13,535               3
                                                                 ----------      ----------        ----------      ----------
   Total expenses                                                    65,299          12,880           122,043          16,791
                                                                 ----------      ----------        ----------      ----------

Loss from operations                                                (12,874)         (1,390)          (22,843)         (2,844)

Interest income, net                                                  2,188             112             2,968             134
Other income, net                                                     1,109             -               1,037             -
                                                                 ==========      ==========        ==========      ==========

Net loss                                                         $   (9,577)     $   (1,278)       $  (18,838)     $   (2,710)
                                                                 ==========      ==========        ==========      ==========

Basic and diluted net loss per share                             $    (0.18)     $    (0.07)       $    (0.43)     $    (0.15)
                                                                 ==========      ==========        ==========      ==========

Shares used in computing basic and diluted net loss per share    $   54,355      $   18,027        $   43,680      $   18,158
                                                                 ==========      ==========        ==========      ==========
</TABLE>

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

                                       4

<PAGE>

                                AVENUE A, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>

                                            Convertible
                                          Preferred Stock         Common Stock                   Deferred
                                        -------------------    ----------------     Paid-In       Stock     Subscription Accumulated
                                          Shares     Amount    Shares    Amount     Capital    Compensation  Receivable    Deficit
                                        -------     -------    ------    ------    --------     ---------     --------    ---------
<S>                                   <C>          <C>        <C>       <C>       <C>         <C>            <C>         <C>
BALANCES, December 31, 1999              16,416     $  164     25,121    $  251    $ 60,447     $ (22,670)    $   (965)   $ (15,260)
 Conversion of preferred stock          (16,416)      (164)    24,624       246         (82)          -            -            -
 Issuance of common stock, net              -          -        6,037        60     132,756           -            -            -
 Exercise of common stock warrant                                 678         7         368
 Exercise of common stock options           -          -        1,645        17       3,975           -            -            -
 Deferred stock compensation
  related to common stock options           -          -          -          -       28,886       (28,886)         -            -
 Amortization of deferred stock
  compensation                              -          -          -          -          -          13,535          -            -
 Unrealized loss on investments             -          -          -          -          -             -            -            -
 Loss on currency translation               -          -          -          -          -             -            -            -
 Net loss                                   -          -          -          -          -             -            -        (18,838)
                                        -------     -------    ------    ------    --------     ---------     --------    ---------
BALANCES, June 30, 2000 (unaudited)         -        $  -      58,105    $  581    $226,350     $ (38,021)    $   (965)   $ (34,098)
                                        =======     =======    ======    ======    ========     =========     ========    =========
</TABLE>


<TABLE>
<CAPTION>
                                                     Accumulated
                                                        Other                  Total
                                                    Comprehensive           Shareholders'
                                                         Loss                  Equity
                                                        ------                 --------
<S>                                                  <C>                    <C>
BALANCES, December 31, 1999                             $ ( 23)               $ 21,944
 Conversion of preferred stock                            -                        -
 Issuance of common stock, net                            -                    132,816
 Exercise of common stock warrant                                                  375
 Exercise of common stock options                         -                      3,992
 Deferred stock compensation
  related to common stock options                         -                        -
 Amortization of deferred stock
  compensation                                            -                     13,535
 Unrealized loss on investments                           (197)                   (197)
 Loss on currency translation                               (3)                     (3)
 Net loss                                                 -                    (18,838)
                                                        ------                --------
BALANCES, June 30, 2000 (unaudited)                     $ (223)               $153,624
                                                        ======                ========
</TABLE>

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

                                       5
<PAGE>
                                 AVENUE A, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>


                                                               Six Months Ended June 30,
                                                            ------------------------------
                                                                  2000          1999
                                                            --------------  --------------
<S>                                                         <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss                                                    $      (18,838)  $    (2,710)
Adjustments to reconcile net loss to net cash used
 in operating activities:
   Depreciation and amortization                                    16,179           255
   Changes in assets and liabilities:
      Accounts receivable                                          (11,084)       (8,221)
      Other receivable and other current assets                     (1,945)            8
      Other assets                                                     (84)          (54)
      Accounts payable                                               2,284         8,405
      Accrued expenses                                                 397           561
      Deferred revenue                                               2,000            32
                                                            --------------  ---------------
Net cash used in operating activities                              (11,091)        1,724
                                                            --------------  ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                 (9,417)         (709)
Purchases of marketable securities, net                            (79,283)          -
Loss on disposal of fixed assets                                       (71)          -
                                                            --------------  ---------------
Net cash used in investing activities                              (88,771)         (709)
                                                            --------------  ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable                                              (137)          -
Proceeds from issuance of common stock and exercises
of common stock options, net                                       137,261          220
Proceeds from issuance of convertible preferred stock, net             -         21,900
Payments to affiliate, net                                             -            (75)
                                                            --------------  ---------------
Net cash provided by financing activities                          137,124        22,045
                                                            --------------  ---------------

Net increases in cash and cash equivalents                          37,262        19,612
Cash and cash equivalents, beginning of period                      10,962           847
                                                            --------------   --------------
Cash and cash equivalents, end of period                    $       48,224  $     20,459
                                                            ==============  ===============
</TABLE>


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


                                       6
<PAGE>

                                 AVENUE A, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 June 30, 2000
               (in thousands except share and per share amounts)
                                  (unaudited)

1.   Organization and Operations of the Company

     Avenue A (the Company) provides technology-based Internet advertising
services to businesses. The Company integrates Internet media planning and
buying, proprietary ad management technology, anonymous user profiling, data
analysis systems, and Precision Email(TM) services to help advertisers increase
the effectiveness and return on investment of their Internet advertising
campaigns. The Company focuses on serving the needs of buyers of Internet
advertising, providing a service that harnesses the complexity, interactivity
and dynamic nature of the Internet with the objective of delivering the most
successful advertising campaigns for its clients.

     The Company began operations in July 1997 and was incorporated in February
1998. On September 2, 1999, the Company completed the acquisition of iballs LLC
(iballs), a full service interactive media planner and buyer. The acquisition
was recorded using the purchase method of accounting, therefore, the results of
operations of iballs and the fair value of the acquired assets and liabilities
were included in the Company's consolidated financial statements beginning on
the acquisition date.

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


2.   Summary of Significant Accounting Policies

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

     These statements reflect all adjustments, consisting only of normal,
recurring adjustments that, in the opinion of the Company's management, are
necessary for a fair presentation of the results of operations for the periods
presented. Operating results for the quarter and six months ended June 30, 2000
are not necessarily indicative of the results that may be expected for any
subsequent quarter or for the year ending December 31, 2000. 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, 1999 and 1998, as included in the
Company's Registration Statement on Form S-1 (Registration No. 333-92301) filed
with the SEC.

     In January 2000, the Board of Directors approved a 3-for-2 stock split of
the Company's common stock paid in the form of a common stock dividend. The
related common stock, per-share data and preferred stock conversion ratios in
the accompanying financial statements have been retroactively adjusted to
reflect the stock split.

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

                                       7
<PAGE>

                                 AVENUE A, INC.
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
                                 June 30, 2000
               (in thousands except share and per share amounts)
                                  (unaudited)

    Revenue Recognition:   Revenue consists of both advertising services revenue
and advertising service fee revenue. Advertising services revenue consists of
the gross value of the Company's billings to its clients, which includes the
price of the advertising space that the Company purchases from Web sites to
resell to its clients. Under advertising services contracts, the Company
purchases advertising space from publisher Web sites and sells the purchased
space to its clients. Under these arrangements, the Company is ultimately
responsible for payment to Web sites for the cost of space the Company
purchases. Advertising service fees revenue consists of commissions earned on
services the Company provides to its clients. To generate revenue from
advertising service fees, 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 the advertising service fee
arrangements, the Company's clients are ultimately responsible for payment to
the publisher Web sites for the cost of the advertising space purchased. Revenue
under both advertising services and advertising service fees is recognized over
the period that the related advertising is delivered.

    Revenue is deferred in cases where the Company has not yet earned
advertising revenue due to billing the customer in advance or receiving payment
from the customer prior to providing the services.

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

    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. The Company operates solely in
one segment, providing Internet advertising services. As of June 30, 2000,
substantially all of the Company's assets are located in the United States. The
Company had no international revenue during the periods presented.

    Recent Accounting Pronouncements:   In June 1998, the FASB issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as a part of a hedge
transaction and, if it is, the type of hedge transaction. This statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company is currently reviewing the impact of this statement on its
financial statements and results of operations.

    In December 1999, the Staff of the Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin 101 (SAB 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. The Company is required to adopt SAB 101 for the quarter ended
December 31, 2000. The Company believes its revenue recognition practices are in
conformity with the guidelines in SAB 101.

    In March 2000, the FASB released FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25," which provides clarification of Opinion 25 for certain issues
such as the determination of an employee, the criteria for determining whether a
plan qualifies as a non-compensatory plan, the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and the accounting for an exchange of stock compensation awards in a business
combination. The Company believes that its

                                       8
<PAGE>

                                AVENUE A, INC.
                   NOTES TO FINANCIAL STATEMENTS--(Continued)
                                 June 30, 2000
               (in thousands except share and per share amounts)
                                  (unaudited)


practices are in conformity with this guidance, and therefore Interpretation No.
44 will have no impact on the Company's financial statements.

3.  Initial Public Offering

    In February 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 for net proceeds of
approximately $132,800, after deducting applicable issuance costs and expenses.
The net proceeds received by the Company will continue to be used for general
corporate purposes, including working capital to fund anticipated operating
losses and to expand operations internationally.

    Upon the closing 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 678,000 shares of common stock was exercised at an aggregate
exercise price of approximately $375.


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             Six Months Ended
                                                                      ------------------             ----------------
                                                                           June 30,                      June 30,
                                                                           --------                      --------
                                                                       2000           1999           2000           1999
                                                                       ----           ----           ----           ----
<S>                                                               <C>            <C>            <C>            <C>
Net Loss (numerator for basic and diluted):....................   $    (9,577)   $    (1,278)   $   (18,838)   $    (2,710)
                                                                  ===========    ===========    ===========    ===========
Shares (denominator for basic and diluted):
  Gross weighted average common shares outstanding.............    58,112,058     18,494,654     47,388,194     18,296,683
    Less:
    Weighted average common shares subject to repurchase.......     3,756,837        467,263      3,707,991        139,032
                                                                   ----------     ----------     ----------     ----------
Shares used in computation.....................................    54,355,221     18,027,391     43,680,203     18,157,651
                                                                  ===========    ===========    ===========    ===========
Basic and diluted net loss per share...........................   $      (.18)   $      (.07)   $      (.43)   $      (.15)
                                                                  ===========    ===========    ===========    ===========
</TABLE>


5.   Acquisition

  Effective September 2, 1999, the Company, in a transaction accounted for as a
purchase, acquired iballs, a New York based, full service interactive media
planning and buying company. In connection with the acquisition, the Company
issued 750,000 shares of common stock and paid $3,500 in cash in exchange for
all of the outstanding members' equity of iballs. The following table presents
the 1999 unaudited pro forma results assuming that the Company had acquired
iballs at the beginning of fiscal year 1999. This information may not
necessarily be indicative of the future combined results of operations of the
Company.

<TABLE>
<CAPTION>
                                                                                    Three Months Ended     Six Months Ended
                                                                                    ------------------     ----------------
                                                                                       June 30, 1999         June 30, 1999
                                                                                       -------------         -------------
<S>                                                                                 <C>                   <C>
  Total revenue.................................................................               $12,053               $15,073
  Net loss......................................................................               $(1,489)              $(3,132)
  Basic and diluted loss per share..............................................               $  (.08)              $  (.17)
</TABLE>

                                       9
<PAGE>

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

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


Overview

  We provide technology-based Internet advertising services to businesses. We
integrate Internet media planning and buying, proprietary ad management
technology, anonymous user profiling, data analysis systems, and Precision
Email(TM) services to help advertisers increase the effectiveness and return on
investment of their Internet advertising campaigns. We focus on serving the
needs of buyers of Internet advertising, providing a service that harnesses the
complexity, interactivity and dynamic nature of the Internet with the objective
of delivering the most successful advertising campaigns for our clients.

  We generate revenue by providing Internet advertising services, which include
the procurement of Internet advertising space for our clients. Due to a change
in the way we structure our advertising contracts, we have changed from
accounting for our revenue primarily as advertising service fee revenue to
accounting for our revenue primarily as advertising services revenue.
Advertising service fee revenue, which is generated under advertising service
fee contracts, consists of commissions earned on services we provide to clients.
Advertising services revenue, which is generated under advertising services
contracts, consists of the gross value of our billings to clients and includes
the price of the advertising space we purchase from Web sites to sell to
clients. Under advertising services contracts, we recognize the cost of the
advertising we purchase for our clients as an expense and the payments we
receive from our clients for this advertising as revenue. Consequently, our
shift from advertising service fee contracts to advertising services contracts
has resulted in recognition of greater revenue and expenses for the same level
of client services and advertising.

  During the first quarter of 1999, we replaced a majority of our advertising
service fee contracts with advertising services contracts. All of the clients we
acquired during 1999 have entered into advertising services contracts, and
substantially all of the contracts with clients prior to 1999 have been
converted to advertising services contracts. To generate advertising services
revenue, we purchase advertising space from publisher Web sites and sell the
purchased space to our clients. Although the increase in our revenue in recent
periods is a result of an increase in our number of clients and increased total
spending by clients, revenue has increased disproportionately relative to prior
periods as a result of the recognition of gross billings to our clients as
revenue in connection with our use of advertising services contracts. Although
we currently derive some of our revenue from advertising service fee contracts,
we expect that the majority of our future revenue will continue to be derived
from advertising services contracts.

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

                                       10
<PAGE>

Results of Operations

 Comparison of the Three and Six Months Ended June 30, 2000 and June 30, 1999

  The following table presents, in dollars and as a percentage of revenue,
unaudited statements of operations data for the three and six months ended June
30, 2000 and 1999. 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 June 30,                       Six Months Ended June,
                                                  --------------------------                        ----------------------
                                                     2000           1999                              2000         1999
                                                     ----           ----                              ----         ----
                                           (in thousands except percentage amounts)       (in thousands except percentage amounts)
<S>                                       <C>          <C>        <C>          <C>       <C>           <C>        <C>         <C>
Revenue................................   $ 52,425      100.0%     $11,490     100.0%     $ 99,200      100.0%    $13,947     100.0%

Expenses:
   Cost of revenue.....................     42,039       80.2        9,498      82.7        80,555       81.2      11,264      80.8
   Client services.....................      3,808        7.3          785       6.8         7,135        7.2       1,245       8.9
   Technology and analytics............      4,127        7.9          530       4.6         7,102        7.2       1,028       7.4
   Selling, general and administrative.      6,392       12.2        1,929      16.8        11,009       11.1       3,002      21.5

   Depreciation and amortization of
    property and equipment.............      1,092        2.1          135       1.2         1,700        1.7         249       1.8
   Amortization of intangible assets...        497        0.9           --        --         1,007        1.0          --        --
   Amortization of deferred stock
    compensation.......................      7,344       14.0            3        --        13,535       13.6           3        --
                                         ---------     ------      -------    ------      --------     ------     -------    ------

       Total expenses..................     65,299      124.6       12,880     112.1       122,043      123.0      16,791     120.4
                                         ---------     ------      -------    ------      --------     ------     -------    ------
Loss from operations...................   (12,874)     (24.6)       (1,390)    (12.1)      (22,843)     (23.0)     (2,844)    (20.4)
Interest income, net...................     2,188        4.2          112       1.0          2,968        3.0         134       1.0
Other income, net......................     1,109        2.1           --        --          1,037        1.1          --        --
                                         --------      ------      -------    ------      --------     ------     -------    ------
Net loss...............................  $ (9,577)     (18.3)%     $(1,278)   (11.1)%    $(18,838)     (18.9)%    $(2,710)   (19.4)%
                                          ========     =====       =======    =====      ========      =====      =======    =====
</TABLE>

  Revenue.   Revenue increased from $11.5 million for the three months ended
June 30, 1999 to $52.4 million for the three months ended June 30, 2000. Revenue
increased from $13.9 million for the six months ended June 30, 1999 to $99.2
million for the six months ended June 30, 2000.  The increase was primarily due
to an increase in the number of our clients from 35 as of June 30, 1999 to 109
as of June 30, 2000 and the change from the use of advertising service fee
contracts to the use of advertising services contracts.

  Cost of revenue.   Cost of revenue consists of the cost of advertising space
that we purchase from publisher Web sites, including inventory purchased by our
AdClub, Inc. subsidiary, and the cost of delivering advertisements over the
Internet. Cost of revenue increased from $9.5 million, or 82.7% of revenue, for
the three months ended June 30, 1999 to $42.0 million, or 80.2% of revenue, for
the three months ended June 30, 2000. Cost of revenue increased from $11.3
million, or 80.8% of revenue, for the six months ended June 30, 1999 to $80.6
million, or 81.2% of revenue, for the six months ended June 30, 2000.  The
increases in cost of revenue were primarily due to increases in the volume of
advertising space we purchased.

  Client services.   Client services expenses consist primarily of salaries and
related expenses for client service personnel. These employees are organized
into Client Service teams consisting of client strategists, media buyers,
account coordinators and media engineers. Client services expenses increased
from $785,000, or 6.8% of revenue, for the three months ended June 30, 1999 to
$3.8 million, or 7.3% of revenue, for the three months ended June 30, 2000.
Client services expenses increased from $1.2 million, or 8.9% of revenue, for
the six months ended June 30, 1999 to $7.1 million, or 7.2% of revenue, for the
six months ended June 30, 2000. The increase in client services expenses was
primarily due to the increase in the number of our Client Service teams, which
was in response to the increase in the number of our clients from 35 as of June
30, 1999 to 109 as of June 30, 2000, and expenses relating to our international
headquarters in the United Kingdom. We anticipate continued increases in our
client services expenses to accommodate growth in our client base.

  Technology and analytics.   Technology and analytics expenses consist of
salaries and related costs for information technology, software development, and
analytics personnel. In addition, these expenses include the cost of housing our
ad

                                       11
<PAGE>

servers and other equipment at third-party co-location facilities. Technology
and analytics expenses increased from $530,000, or 4.6% of revenue, for the
three months ended June 30, 1999 to $4.1 million, or 7.9% of revenue, for the
three months ended June 30, 2000. Technology and analytics expenses increased
from $1.0 million, or 7.4% of revenue, for the six months ended June 30, 1999 to
$7.1 million, or 7.2% of revenue, for the six months ended June 30, 2000. The
increase in technology and analytics expenses was primarily due to increases in
the number of personnel in software development, production systems, information
systems, and analytics. Due to our increasing volume of advertisements served,
we have increased our capacity for ad serving, in part by adding computer
equipment to the data centers maintained at our co-location facilities,
resulting in increased rental charges. We anticipate continued increases in our
technology and analytics expenses in future periods as we add additional
technology-based services to our service offering, supply additional
productivity tools to our Client Service teams and accommodate additional
clients.

  Selling, general and administrative.   Selling, general and administrative
expenses consist primarily of salaries and related expenses for executive,
sales, finance, marketing, human resource and administrative personnel and other
general corporate expenses. In addition, these expenses include marketing costs
such as trade shows and the costs of advertising our services in trade
publications. Selling, general and administrative expenses increased from $1.9
million, or 16.8% of revenue, for the three months ended June 30, 1999 to $6.4
million, or 12.2% of revenue, for the three months ended June 30, 2000. Selling,
general and administrative expenses increased from $3.0 million, or 21.5% of
revenue, for the six months ended June 30, 1999 to $11.0 million, or 11.1% of
revenue, for the six months ended June 30, 2000.  The increase in selling,
general and administrative expenses was primarily due to increases in the number
of personnel. During the period, we added substantially to our management team,
developed an in-house accounting function, created a marketing department and
increased our recruiting efforts. We anticipate continued growth of our selling,
general and administrative expenses as we expand our administrative and
marketing staff, add new marketing programs and incur additional costs
associated with being a public company.   Selling, general, and adminstrative
expenses as a percentage of revenue decreased as a result of revenues growing at
a faster rate than expenses.

  Depreciation and amortization of property and equipment.   Depreciation and
amortization of property and equipment consists primarily of depreciation
expense on computer equipment, furniture and fixtures, and software costs and
amortization expense of leasehold improvements. Depreciation and amortization of
property and equipment increased from $135,000, or 1.2% of revenue, for the
three months ended June 30, 1999 to $1.1 million, or 2.1% of revenue, for the
three months ended June 30, 2000. Depreciation and amortization of property and
equipment increased from $249,000, or 1.8% of revenue, for the six months ended
June 30, 1999 to $1.7 million, or 1.7% of revenue, for the six months ended June
30, 2000. The dollar increase was primarily due to purchases of production
equipment for operations and computer equipment as a result of increased
personnel.

  Amortization of intangible assets.   In connection with the purchase of
iballs, LLC (iballs) during September 1999, we recorded intangible assets of
approximately $6.0 million related to the iballs customer base and workforce.
During the three and six month periods ended June 30, 2000, we recorded
amortization of these intangible assets of $497,000 and $1.0 million,
respectively.

  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. During the
three and six month periods ended June 30, 2000, we recorded amortization of
deferred stock compensation of $7.3 million and $13.5 million, respectively.

  Interest income, net.   Net interest income consists of earnings on our cash
and cash equivalents. Net interest income increased from $112,000, or 1.0% of
revenue, for the three months ended June 30, 1999 to $2.2 million, or 4.2% of
revenue, for the three months ended June 30, 2000. Net interest income increased
from $134,000, or 1.0% of revenue, for the six months ended June 30, 1999 to
$3.0 million, or 3.0% of revenue, for the six months ended June 30, 2000. The
increase was primarily due to higher invested cash balances resulting from our
initial public offering of common stock, which was completed during the first
quarter of 2000.

  Other income, net.   Net other income consists of non-recurring miscellaneous
income transactions.  During the three and six month periods ended June 30,
2000, we recorded net other income of $1.1 million and $1.0 million,
respectively.

                                       12
<PAGE>

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


Liquidity and Capital Resources

  Since inception we have financed our operations primarily through the net
proceeds from private sales of equity securities, which raised $30.4 million
through December 31, 1999, and our initial public offering of common stock,
which raised $132.8 million during the first quarter of 2000.

  As of June 30, 2000, we had cash and cash equivalents of $48.2 million and
short-term investments of $90.9 million. We have a $6.0 million equipment term
loan facility with Silicon Valley Bank of which $1 million was fully utilized as
of June 30, 2000.

  Cash used in operating activities was $11.1 and and $1.7 million for the six
months ended June 30, 2000 and 1999, respectively.

  Cash used in investing activities was $88.8 million and $709,000 for the six
months ended June 30, 2000 and 1999, respectively. Cash used in investing
activities for the six months ended June 30, 2000 was primarily related to
purchases of marketable securities and purchases of computer equipment to expand
our ad serving capacity and to equip employees hired during that period.

  Cash provided by financing activities was $137.1 million and $22.0 million for
the six months ended June 30, 2000 and 1999, respectively. The cash provided by
financing activities during the six months ended June 30, 2000 primarily related
to the net proceeds related to our initial public offering of common stock,
which raised approximately $132.8 million in the first quarter of 2000.

  As of June 30, 2000, we had no material commitments other than obligations
under operating leases for office space and office equipment, of which some
commitments extend through 2004, and a note payable to a bank which requires
monthly payments through 2002. This note is secured by the equipment purchased
with the proceeds from the note.

  Since our inception, we have significantly increased our operating expenses.
We currently anticipate that we will continue to experience significant growth
in our operating expenses and that such expenses will 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 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as a part of a hedge
transaction and, if it is, the type of hedge transaction. This statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. We are currently reviewing the impact of this statement on our financial
statements and results of operations.

  In December 1999, the Staff of the Securities and Exchange Commission released
Staff Accounting Bulletin 101 (SAB 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. We are
required to adopt SAB 101 for the quarter ended December 31, 2000. We believe
our revenue recognition practices are in conformity with the guidelines in SAB
101.

  In March 2000, the FASB released FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25," which provides clarification of Opinion 25 for certain issues
such as the determination of an employee, the criteria for determining whether a
plan qualifies as a non-compensatory plan, the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and the

                                       13
<PAGE>

accounting for an exchange of stock compensation awards in a business
combination. We believe that our practices are in conformity with this guidance,
and therefore Interpretation No. 44 will have no impact on the our financial
statements.

                                       14
<PAGE>

FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL
CONDITION

  You should carefully consider the risks described below together with all of
the other information included in this quarterly report on Form 10-Q. The risks
and uncertainties described below are not the only ones facing our company. If
any of the following risks actually occurs, our business, financial condition or
operating results could be harmed.


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

  Our prospects for financial and operational success must be considered in
light of the risks frequently encountered by early-stage 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 unproven and evolving;

  . manage our expanding operations;

  . 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 anticipate continued losses

  We incurred net losses of $15.8 million for the period from our inception on
July 1, 1997 through December 31, 1999,and net losses of $18.8 million for the
six months ended June 30, 2000. As of June 30, 2000, our accumulated deficit was
$34.1 million. We have not achieved profitability and expect to continue to
incur operating losses for the foreseeable future. We expect to continue to make
significant operating and capital expenditures and, as a result, we will 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 if our operating
expenses exceed our expectations or cannot be reduced, we will 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
investors. 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.

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

                                       15
<PAGE>

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

  .  addition of new clients or loss of current clients;

  .  seasonal fluctuations in advertising spending;

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

  .  changes in the availability and pricing of advertising space;

  .  timing and amount of costs relating to the expansion of our operations; and

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

  Our current and future expense estimates are based, in large part, on
estimates of future revenue, which is difficult to predict. In particular, we
plan to increase our operating expenses significantly in order to enhance our
proprietary technology, expand our client services, sales and marketing
operations and expand internationally. We may be unable to, or may elect not to,
adjust spending quickly enough to offset any unexpected revenue shortfall. If
our expenses are not accompanied by increased revenue in the same quarter, our
quarterly operating results would be harmed.


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

  Our stock price may decline due to seasonal fluctuations. We believe that our
operating results will fluctuate depending on the season because retail
advertisers generally purchase substantially more advertising space during the
fourth calendar quarter of each year than during other quarters, particularly
the first calendar quarter. Given our limited operating history, we cannot be
certain how pronounced these seasonal trends may be or what, if any, other
seasonal trends may emerge that would affect our business.


Our 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 would 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. A U.S. patent was issued
to DoubleClick Inc. in September 1999 which may cover some of the technologies,
processes or methods that we use in our ad serving systems. We cannot assure you
that we will be able to distinguish our technologies, processes or methods from
those covered under the DoubleClick patent or that the DoubleClick patent would
be invalidated if challenged. In addition, patents have been issued to 24/7
Media, Inc. and MatchLogic, Inc., a subsidiary of At Home Corporation, that
appear to cover technologies relating to ad serving. 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
                                       16
<PAGE>

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 could be
costly and time-consuming and could divert the attention of our management and
key personnel from our business operations. Furthermore, as a result of a patent
infringement suit, we may be prevented from providing some of our services,
including our core ad serving services, unless we enter into royalty or license
agreements. We may not be able to obtain royalty or license agreements on terms
acceptable to us, if at all.


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

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

  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 the name "Avenue A" or similar names, one of which is a
Canadian advertising agency. There may be other third parties using names
similar to ours of whom we are unaware. We may be subject to trademark
infringement claims by third parties as a result of our use of the name "Avenue
A." In addition, we may not receive approval of our service mark application for
the name "Avenue A," and even if the application is approved, the service mark
may be challenged by third parties or invalidated. As a result of such
infringement claims or challenges, we may incur significant expenses, pay
substantial damages and be prevented from using the name "Avenue A" unless we
enter into royalty or license agreements. We may not be able to obtain royalty
or license 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.


 Third parties may assert claims against us relating to the collection and use
 of Internet user information

  Third parties may claim that our collection and use of Internet user
information violates federal or state laws, which may cause us to incur
significant expenses, pay substantial damages and be prevented from conducting
targeted advertising and aggregating data from our clients' advertising
campaigns. Several Internet-related companies, including some in the Internet
advertising industry, have recently been sued under federal and state laws, or
had claims brought against them before the Federal Trade Commission, regarding
the collection and use of Internet user information. Any claim by a third party
against us regarding our collection and use of Internet user information could
harm our business.


 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 any member of our management team or other key
employees could harm our business. Our future success depends to a significant
extent on the continued service of our key management, client service,
engineering,

                                       17
<PAGE>

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. In particular, we will need to hire a significant
number of client service 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 personnel, as well as engineering, sales and
technical personnel, we will not be able to maintain or expand our business.


 Many 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. Many of our principal 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 have many competitors and may not be able to compete successfully in the
 market for Internet advertising

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

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

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

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

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

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

  We believe that the principal competitive factors affecting our market are ad
serving technology and functionality, data analysis capabilities, client service
and price. Although we believe we currently compete adequately with respect to
these factors, our continued ability to compete depends on a number of
circumstances, such as:

  .  our capability to plan advertising campaigns and serve advertisements
       across a broad range of Web sites;

  .  our ability to respond to rapid technological change and provide feature
       enhancements and expanded service offerings;

  .  the quality and reliability of our operations and client service and
       support organizations; and

  .  the effectiveness of our sales and marketing efforts.

                                       18
<PAGE>

  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, including AdForce, Inc.,
AdKnowledge, Inc., Engage Technologies, Inc. and Flycast Communications
Corporation, have combined or are in the process of combining 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

  Many of our clients may be affected by rapid consolidation in the Internet
industry. For example, CMGI, Inc. recently acquired uBid, Inc., one of our top
four clients. 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.


 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 is currently occurring at a
rapid pace and may 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 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 Networks Services. 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,

                                       19
<PAGE>

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.


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

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

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

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

  .  unavailability of favorable financing for future acquisitions;

  .  potential loss of key employees of acquired businesses;

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

  .  responsibility for liabilities of acquired businesses;

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

  .  increased fixed costs.


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

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


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

  International expansion of our operations could impose substantial burdens on
our resources, divert management's attention from domestic operations, and
otherwise harm our business. This expansion into international markets will
require extensive management attention and resources. In addition, we may need
to rely extensively on third parties in foreign countries to help conduct our
international operations, coordinate with foreign Web sites and conduct sales
and marketing efforts. Our success in international markets will depend to a
large degree on the success of these third parties, over whom we may have little
control, and on their willingness to dedicate sufficient resources to our
relationships. Furthermore, international operations are subject to several
inherent risks, including:

  .  difficulties and costs of staffing and managing foreign offices;

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

  .  changes in regulatory requirements;

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<PAGE>

  .  export restrictions, including export controls relating to encryption
       technology;

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

  .  reduced protection of intellectual property rights;

  .  adverse tax consequences;

  .  political and economic instability;

  .  tariffs and other trade barriers; and

  .  fluctuations in currency exchange rates.

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


 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, fund our expansion, 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, fund our expansion, respond to competitive pressures or
take advantage of business opportunities would be significantly limited, and we
might need to significantly restrict our operations.


 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 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. Cookies are small files of
information stored on a user's computer which allow us to recognize that user's
browser when we serve advertisements. Cookies are often placed on the user's
computer without the user's knowledge or consent. Our systems use "cookies" to
track Internet users and their online behavior to build user profiles. We are
substantially dependent on cookie technology and user profiling to target our
clients' advertising campaigns and measure their effectiveness. Any reduction in
our ability to use cookies or other means to build user profiles could harm our
business.

  Governmental bodies concerned with the privacy of Internet users have
suggested limiting or eliminating the use of cookies or user profiling. Bills
aimed at regulating the collection and use of personal data from Internet users
are currently pending in the federal and 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 and user profiling in some
jurisdictions. For example, the European Union recently adopted a directive
addressing data privacy that may result in limitations on the collection and use
of information regarding European Internet users. Also, Germany has imposed its
own laws limiting the use of user profiling, and other countries may impose
similar limitations. In addition, users may limit or eliminate the placement of
cookies on their computers by using third-party software that blocks cookies, or
by disabling the cookie functions of their Internet browser software. If our
ability to use cookies or build user profiles were substantially restricted by
technology, government regulation or any other means, 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

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<PAGE>

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
at all, or might be prohibitively expensive.


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

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


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

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


 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 22 week period ended July 28, 2000, the
closing price of our common stock ranged from $6.88 to $72.00 per share. The
market price of our common stock may fluctuate significantly in response to a
number of factors, including:

  . quarterly variations in our operating results;

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

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

  . additions or departures of key personnel;

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

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

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

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<PAGE>

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.

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<PAGE>

                          PART II.   OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

  From time to time, we are subject to legal proceedings and claims in the
ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, prospects, financial
condition and results of operations.

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 $12.1 million,
including underwriting discounts and commissions of approximately $10.1 million.
All of these expenses were direct or indirect payments to others and not
payments to our directors or officers (or their associates) or to our affiliates
or 10% shareholders. We placed all of the net offering proceeds in temporary
investments consisting of cash, cash equivalents and short-term investments.
None of the proceeds was used as payments to our directors or officers (or their
associates), or to our affiliates or 10% shareholders.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

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

     10.1  Agreement Concerning Leases dated June 27, 2000
     10.2  Employment Agreement between Avenue A, Inc. and James A. Warner
     10.3  Amended and Restated bylaws of Avenue A, Inc.

     27.1  Financial Data Schedule for the period ended June 30, 2000


  (b) Reports on Form 8-K

       No reports on Form 8-K were filed during the quarter ended June 30, 2000.


                                   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 August 9, 2000.

                                  AVENUE A, INC.


                                  By:          /s/   Robert M. Littauer
                                  _____________________________________
                                                     Robert M. Littauer
                   Vice President, Chief Financial Officer, Secretary and
                   Treasurer (Authorized Officer and Principal Financial
                                         Officer)

                                       24
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
---------
 Number                              Description
---------     ------------------------------------------------------------------
<S>           <C>
 10.1          Agreement Concerning Leases dated June 27, 2000
 10.2          Employment Agreement between Avenue A, Inc. and James A. Warner
 10.3          Amended and Restated bylaws of Avenue A, Inc.
 27.1          Financial Data Schedule for the period ended June 30, 2000
</TABLE>

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