<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, 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 July
31, 2001 was 58,011,480.

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

                                       1

<PAGE>

                                AVENUE A, INC.

                                   FORM 10-Q

                      FOR THE QUARTER ENDED JUNE 30, 2001

                               TABLE OF CONTENTS

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

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...................................  28

                                 PART II.   OTHER INFORMATION

Item 1.  Legal Proceedings............................................................................  28

Item 2.  Changes in Securities and Use of Proceeds....................................................  30

Item 4.  Submission of Matters to a Vote of Security Holders..........................................  30

Item 6.  Exhibits and Reports on Form 8-K.............................................................  31
</TABLE>

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                               June 30,          December 31,
                                                                                 2001               2000
                                                                           ---------------  ----------------
                                                                             (unaudited)
<S>                                                                        <C>              <C>
                                      Assets
Current assets:
 Cash and cash equivalents...............................................        $ 36,448          $ 38,888
 Short-term investments..................................................          83,047            95,257
 Accounts receivable, net of allowance of $2,998 and $3,616 at June 30,
  2001 and December 31, 2000, respectively...............................          13,781            39,343
 Other receivables.......................................................           1,612             1,824
 Prepaid expenses and other current assets...............................             952               716
                                                                                 --------          --------
Total current assets.....................................................         135,840           176,028

Property and equipment, net..............................................          10,380            13,087
Intangible assets, net...................................................           2,330             3,519
Other assets.............................................................           2,672             5,671
                                                                                 --------          --------
Total assets.............................................................        $151,222          $198,305
                                                                                 ========          ========

                      Liabilities and Shareholders' Equity

Current liabilities:
 Accounts payable........................................................        $ 14,577          $ 42,449
 Accrued expenses........................................................           9,158             6,215
 Notes payable, current portion..........................................           2,000             2,000
 Deferred revenue........................................................           1,258             1,084
                                                                                 --------          --------
Total current liabilities................................................          26,993            51,748

Notes payable, less current portion......................................           2,559             3,556
                                                                                 --------          --------
Total liabilities........................................................          29,552            55,304
                                                                                 --------          --------
Shareholders' equity:
 Common stock, $0.01 par value; 200,000 shares authorized; 58,069 and
  58,139 shares issued and outstanding at June 30, 2001 and December 31,
  2000, respectively.....................................................             581               581
 Paid-in capital.........................................................         218,210           222,901
 Deferred stock compensation.............................................          (9,758)          (21,566)
 Subscription receivable.................................................            (710)             (941)
 Accumulated deficit.....................................................         (87,152)          (58,189)
 Accumulated other comprehensive income..................................             499               215
                                                                                 --------          --------
Total shareholders' equity...............................................         121,670           143,001
                                                                                 --------          --------
Total liabilities and shareholders' equity...............................        $151,222          $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          Six Months Ended
                                                                       ------------------          ----------------
                                                                            June 30,                   June 30,
                                                                            --------                   --------
                                                                        2001          2000          2001         2000
                                                                      --------      --------      --------     --------
<S>                                                                   <C>           <C>           <C>          <C>
Revenue............................................................   $ 20,602      $ 52,425      $ 44,737     $ 99,200
Expenses:
  Cost of revenue..................................................     14,826        42,039        33,280       80,555
  Client support...................................................      2,692         3,857         6,040        7,183
  Product development..............................................      3,496         3,349         7,003        4,926
  Selling, general, and administrative.............................      7,106         7,121        14,055       13,137
  Depreciation and amortization of property and equipment..........      1,499         1,092         2,961        1,700
  Amortization of intangible assets................................        498           497           999        1,007
  Amortization of deferred stock compensation......................      2,880         7,344         6,716       13,535
  Corporate restructuring charges..................................      2,166             -         3,666            -
                                                                      --------      --------      --------     --------
     Total expenses................................................     35,163        65,299        74,720      122,043
                                                                      --------      --------      --------     --------
Loss from operations...............................................    (14,561)      (12,874)      (29,983)     (22,843)

Interest income, net...............................................      1,586         2,188         3,529        2,968
Other income, net..................................................          -         1,109             -        1,037
Impairment of cost-basis investment................................     (2,500)            -        (2,500)           -
                                                                      --------      --------      --------     --------

Net loss...........................................................   $(15,475)     $ (9,577)     $(28,954)    $(18,838)
                                                                      ========      ========      ========     ========

Basic and diluted net loss per share...............................   $  (0.27)     $  (0.18)     $  (0.51)    $  (0.43)
                                                                      ========      ========      ========     ========

Shares used in computing basic and diluted net loss per share......     57,051        54,355        56,890       43,680
                                                                      ========      ========      ========     ========
Comprehensive loss:
   Net loss........................................................   $(15,475)     $ (9,577)     $(28,954)    $(18,838)
   Items of comprehensive income (loss)............................        (46)          (65)          285         (200)
                                                                      --------      --------      --------     --------
     Comprehensive loss............................................   $(15,521)     $ (9,642)     $(28,669)    $(19,038)
                                                                      ========      ========      ========     ========
</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>
                                                                                               Six Months Ended
                                                                                               ----------------
                                                                                                    June 30,
                                                                                                    --------
                                                                                             2001            2000
                                                                                           --------        --------
<S>                                                                                        <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss...............................................................................  $(28,954)       $(18,838)
  Adjustments to reconcile net loss to net cash used
    in operating activities:
     Depreciation and amortization.......................................................    10,647          16,179
     Loss on disposal of fixed assets....................................................         -              71
     Impairment of cost-basis investment and long-lived assets...........................     3,188               -
     Non-cash compensation...............................................................       257               -
     Changes in assets and liabilities:
        Accounts receivable..............................................................    25,562         (11,084)
        Other receivables and other current assets.......................................       (24)         (1,945)
        Other assets.....................................................................       499             (84)
        Accounts payable.................................................................   (27,872)          2,284
        Accrued expenses.................................................................     2,942             397
        Deferred revenue.................................................................       174           2,000
                                                                                           --------        --------
     Net cash used in operating activities...............................................   (13,581)        (11,020)
                                                                                           --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment....................................................      (723)         (9,559)
  Sales (purchases) of marketable securities, net........................................    12,487         (79,283)
                                                                                           --------        --------
     Net cash provided by (used in) investing activities.................................    11,764         (88,842)
                                                                                           --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment of notes payable...............................................................      (996)           (137)
  Proceeds from issuance of common stock and exercises of
    common stock options, net............................................................       373         137,261
                                                                                           --------        --------
     Net cash (used in) provided by financing activities.................................      (623)        137,124
                                                                                           --------        --------
Net (decrease) increase in cash and cash equivalents.....................................    (2,440)         37,262
Cash and cash equivalents, beginning of period...........................................    38,888          10,962
                                                                                           --------        --------
Cash and cash equivalents, end of period.................................................  $ 36,448        $ 48,224
                                                                                           ========        ========
</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
                                 June 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 uses Internet media planning and buying,
proprietary ad management technology, anonymous user profiling and data analysis
systems to help advertisers increase the effectiveness and return on investment
of their Internet advertising campaigns. The Company was founded on July 1, 1997
and incorporated on February 27, 1998 in Washington State. The Company's
headquarters are located in Seattle.

     In 2000, the Company commenced international operations and opened offices
in Europe. As part of restructuring programs initiated during January 2001 and
May 2001, the Company terminated employees in international offices.

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

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

2.   Summary of Significant Accounting Policies

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

     These statements reflect all adjustments, consisting only of normal,
recurring adjustments that, in the opinion of the Company's management, are
necessary for a fair presentation of the results of operations for the periods
presented. Operating results for the three and six months ended June 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
                                 June 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 conversion of preferred stock, and exercise
of common stock options and warrants are antidilutive.

                                       7
<PAGE>

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

     Recent Accounting Pronouncements: In June 2001, the Financial Accounting
Standards Board 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.

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                  Six Months Ended
                                                                ------------------------------      ----------------------------
                                                                           JUNE 30,                           JUNE 30,
                                                                           --------                           --------
                                                                    2001               2000            2001             2000
                                                                -----------        -----------      -----------      -----------
<S>                                                             <C>                <C>              <C>              <C>
Net Loss (numerator for basic and diluted):..................   $   (15,475)       $    (9,577)     $   (28,954)     $   (18,838)
                                                                ===========        ===========      ===========      ===========

Shares (denominator for basic and diluted):..................    58,112,135         58,112,058       58,111,308       47,388,194
  Gross weighted average common shares outstanding
     Less:
     Weighted average common shares subject to repurchase....     1,060,839          3,756,837        1,221,612        3,707,991
                                                                -----------        -----------      -----------      -----------
Shares used in computation...................................    57,051,296         54,355,221       56,889,697       43,680,203
                                                                ===========        ===========      ===========      ===========
Basic and diluted net loss per share.........................   $      (.27)       $      (.18)     $      (.51)     $      (.43)
                                                                ===========        ===========      ===========      ===========
</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
                                 June 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 six months
ended June 30, 2001, Avenue A generated revenue of $20,602 and $44,737 and
related operating income of $1,868 and $2,352, respectively, and Atlas DMT
generated no revenue and an operating loss of $4,573 and $9,473, 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 June 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 June 30, 2001, and $400 related to future cash outlays that are
expected to be incurred during 2001 from existing lease agreements for office
space that is no longer in use and other liabilities for which there is a
contractual obligation, of which $298 has been paid as of June 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 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 $1,624 had
been paid as of June 30, 2001, and $114 related to future cash outlays that are
expected to be incurred during 2001 from existing lease agreements for office
space that is no longer in use, other liabilities for which there is a
contractual obligation, of which none has been paid as of June 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 June 30, 2001 consolidated statements of operations. 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.

                                       9
<PAGE>

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

7.  Legal Proceedings

     The Company is currently the subject of two 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 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. The plaintiffs seek
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. Plaintiffs have moved for class certification and we have filed an
opposition to that motion. We have also filed a motion for summary judgment,
requesting that the Court dismiss plaintiffs' federal claims and decline
jurisdiction over plaintiffs' state claims. A trial date has been set for June
2002.

     In 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
the Company has received in connection with the alleged illegal practices. The
case is currently pending in the district court.

                                       10
<PAGE>

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

     The Company is currently aware of five lawsuits alleging 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.

     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, Nicholas 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, Nicholas
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
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.

                                       11
<PAGE>

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

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. (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 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. (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 complaints allege that the Securities and Exchange Commission
and/or other regulatory authorities are investigating matters similar to those
alleged in the complaints, but the Company has no knowledge as to whether any
such purported investigations pertain to the Company or its initial public
offering.


                                       12
<PAGE>

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

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

OVERVIEW

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

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

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

                                       13
<PAGE>

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

Results of Operations

 Comparison of the Three and Six Months Ended June 30, 2001 and June 30, 2000

     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, 2001 and June 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 June 30,                   Six Months Ended June 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................................   $ 20,602      100.0%   $ 52,425     100.0%    $ 44,737      100.0%   $ 99,200     100.0%
Expenses:
  Cost of revenue......................     14,826       72.0%     42,039      80.2%      33,280       74.4%     80,555      81.2%
  Client support.......................      2,692       13.1%      3,857       7.4%       6,040       13.5%      7,183       7.2%
  Product development..................      3,496       17.0%      3,349       6.4%       7,003       15.7%      4,926       5.0%
  Selling, general and administrative..      7,106       34.5%      7,121      13.6%      14,055       31.4%     13,137      13.2%
  Depreciation and amortization of
   property and equipment..............      1,499        7.3%      1,092       2.1%       2,961        6.6%      1,700       1.7%
  Amortization of intangible assets....        498        2.4%        497       0.9%         999        2.2%      1,007       1.0%
  Amortization of deferred stock
   compensation........................      2,880       14.0%      7,344      14.0%       6,716       15.0%     13,535      13.6%
  Corporate restructuring charges......      2,166       10.5%         --        --%       3,666        8.2%         --        --%
                                          --------     ------    --------    ------     --------     ------    --------    ------
     Total expenses....................     35,163      170.7%     65,299     124.6%      74,720      167.0%    122,043     123.0%
                                          --------     ------    --------    ------     --------     ------    --------    ------
Loss from operations...................    (14,561)     (70.7)%   (12,874)    (24.6)%    (29,983)     (67.0)%   (22,843)    (23.0)%
Interest income, net...................      1,586        7.7%      2,188       4.2%       3,529        7.9%      2,968       3.0%
Other income, net......................         --         --%      1,109       2.1%          --         --%      1,037       1.1%
Impairment of cost-basis investment....     (2,500)     (12.1)%        --        --%      (2,500)      (5.6)%        --        --%
                                          --------     ------    --------    ------     --------     ------    --------    ------
Net loss...............................   $(15,475)     (75.1)%  $ (9,577)    (18.3)%   $(28,954)     (64.7)%  $(18,838)    (18.9)%
                                          ========     ======    ========    ======     ========     ======    ========    ======
</TABLE>

     Revenue. Revenue decreased to $20.6 million for the three months ended June
30, 2001 from $52.4 million for the three months ended June 30, 2000. Revenue
decreased to $44.7 million for the six months ended June 30, 2001 from $99.2
million for the six months ended June 30, 2000. The decreases in revenue were
primarily due to two factors. First, revenue contributions from Internet clients
has declined due to the downturn in the Internet sector that has caused many
Internet companies to go out of business or to reduce advertising spending to
conserve cash. Second, the general softness in the economy has caused larger
advertisers to reduce spending.

     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
$14.8 million, or 72.0% of revenue, for the three months ended June 30, 2001
from $42.0 million, or 80.2% of revenue, for the three months ended June 30,
2000. Cost of revenue decreased to $33.3 million, or 74.4% of revenue, for the
six months ended June 30, 2001 from $80.6 million, or 81.2% of revenue, for the
six months ended June 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 and improved pricing in

                                       14
<PAGE>

our core services. 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 revenue products
such as the Strategic Partnership Program and consulting. Client support
expenses were $2.7 million, or 13.1% of revenue, for the three months ended June
30, 2001 and $3.9 million, or 7.4% of revenue for the three months ended June
30, 2000. Client support expenses were $6.0 million, or 13.5% of revenue, for
the six months ended June 30, 2001 and $7.2 million, or 7.2% of revenue for the
six months ended June 30, 2000. The dollar decreases in client support expenses
were primarily due to reductions in workforce completed during January 2001 and
May 2001. 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.

     Product development. Product development expenses consist of salaries and
related expenses for product development as well as research and development
personnel. In addition, product development expenses include the costs of
software development and the costs incurred for preparing our Atlas(TM) Digital
Marketing Suite for sale to external clients. Product development expenses
increased to $3.5 million, or 17.0% of revenue, for the three months ended June
30, 2001 from $3.3 million, or 6.4% of revenue, for the three months ended June
30, 2000. Product development expenses increased to $7.0 million, or 15.7% of
revenue, for the six months ended June 30, 2001 from $4.9 million, or 5.0% of
revenue, for the six months ended June 30, 2000. The increases in product
development expenses, on both a dollar and percentage of revenue basis, were
primarily due to increases in the number of personnel in product and software
development for our Atlas(TM) Digital Marketing Suite partially offset by
reductions in workforce completed during January 2001 and May 2001. We expect to
incur incremental expenses during the year associated with the costs to prepare
our Atlas(TM) Digital Marketing Suite for external clients.

     Selling, general and administrative. Selling, general and administrative
expenses consist primarily of salaries and related expenses for executive,
sales, finance, marketing, human resource and administrative personnel and other
general corporate expenses including rent. In addition, these expenses include
marketing costs such as trade shows and the costs of advertising our services in
trade publications. Selling, general and administrative expenses were $7.1
million, or 34.5% of revenue, for the three months ended June 30, 2001 and $7.1
million, or 13.6% of revenue, for the three months ended June 30, 2000. Selling,
general and administrative expenses were $14.1 million, or 31.4% of revenue, for
the six months ended June 30, 2001 and $13.1 million, or 13.2% of revenue, for
the six months ended June 30, 2000. The dollar increases in selling, general and
administrative expenses for the six months ended June 30, 2001 were primarily
due to increases in professional services, legal, and rent expenses. These
increases were partially offset by a decrease in personnel expenses as a result
of the reductions in force during January 2001 and May 2001. 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
do not expect these expenses to increase as a percentage of revenue for the
remainder of the year.

     Depreciation and amortization of property and equipment. Depreciation and
amortization of property and equipment consists primarily of depreciation
expense on computer equipment, furniture and fixtures, and software costs and
amortization expense of leasehold improvements. Depreciation and amortization of
property and equipment increased to $1.5 million, or 7.3% of revenue, for the
three months ended June 30, 2001 from $1.1 million, or 2.1% of revenue, for the
three months ended June 30, 2000. Depreciation and amortization of property and
equipment increased to $3.0 million, or 6.6% of revenue, for the six months
ended June 30, 2001 from $1.7 million, or 1.7% of revenue, for the six months
ended June 30, 2000. The dollar increases were primarily due to purchases of
assets during 2001 and 2000. 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.

                                       15
<PAGE>

  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 $498,000,
or 2.4% of revenue, and $497,000, or 0.9% of revenue, for the three months ended
June 30, 2001 and 2000, respectively.  Amortization of intangible assets was
$999,000, or 2.2% of revenue, and $1.0 million, or 1.0% of revenue, for the six
months ended June 30, 2001 and 2000, respectively.  The increase in amortization
of intangible assets as a percentage of revenue was primarily due to our revenue
decreasing at a faster rate than our expenses.

  Amortization of deferred stock compensation.   Amortization of deferred stock
compensation consists of expenses related to employee stock option grants with
option exercise prices below the deemed fair value of our common stock as of the
date of grant. Deferred stock compensation is being amortized on an accelerated
basis over the four-year vesting period of the applicable options. Amortization
of deferred stock compensation decreased to $2.8 million, or 14.0% of revenue,
for the three months ended June 30, 2001 from $7.3 million, or 14.0% of revenue,
for the three months ended June 30, 2000. Amortization of deferred stock
compensation decreased to $6.7 million, or 15.0% of revenue, for the six months
ended June 30, 2001 from $13.5 million, or 13.6% of revenue, for the six months
ended June 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 for the six months
ended June 30, 2001 was primarily due to our revenue decreasing at a faster rate
than our expenses.

  Corporate restructuring charges.  Corporate restructuring charges consist of
severance costs and other expenses 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 three
and six months ended June 30, 2001 were $2.2 million and $3.7 million,
respectively.   For the three and six months ended June 30, 2001, corporate
restructuring charges included $1.9 million and $3.0 million, respectively,
relating to employee severance and benefits for terminated employees and
$114,000 and $514,000, respectively, related to future cash outlays that are
expected to be incurred during 2001 from existing lease agreements for office
space that is no longer in use and other liabilities for which there is a
contractual obligation.  Corporate restructuring charges for the three months
ended June 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 $1.6 million, or 7.7% of
revenue, for the three months ended June 30, 2001 from $2.2 million, or 4.2% of
revenue, for the three months ended June 30, 2000.  The dollar decrease in net
interest income was due to lower invested balances as a result of cash used
during the quarter.  The percentage increase in net interest income was due to
the decrease in revenue.  Net interest income increased to $3.5 million, or 7.9%
of revenue, for the six months ended June 30, 2001 from $3.0 million, or 3.0% of
revenue, for the six months ended June 30, 2000.  The dollar increase in net
interest income was primarily due to higher invested cash balances resulting
from our initial public offering of common stock in February 2000.

  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 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.

                                       16
<PAGE>

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 June 30, 2001, we had cash and cash equivalents of $36.4 million and
short-term investments of $83.0 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 June 30, 2001 and December 31, 2000.

  Cash used in operating activities was $13.6 million and $11.0 million for the
six months ended June 30, 2001 and 2000, respectively.

  Cash provided by investing activities was $11.8 million for the six months
ended June 30, 2001.  Cash used in investing activities was $88.8 million for
the six months ended June 30, 2000. Cash provided by investing activities for
the six months ended June 30, 2001 was primarily related to sales of marketable
securities offset by purchases of equipment for our production systems and
purchases of software.

  Cash used in financing activities was $623,000 for the six months ended June
30, 2001.  Cash used by financing activities was primarily due to the payments
of notes payable during the six months ended June 30, 2001.  Cash provided by
financing activities was $137.1 million for the six months ended June 30, 2000.
Cash provided by financing activities during the six months ended June 30, 2000
primarily related to the net proceeds from our initial public offering of common
stock in February 2000.

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

                                       17
<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 $29.0 million for
the six months ended June 30, 2001.  As of June 30, 2001, our accumulated
deficit was $87.2 million.  We have not achieved profitability and may not do so
in the future.  We expect to continue to make significant operating and capital
expenditures and, as a result, we may need to generate significant additional
revenue to achieve and maintain profitability.  We cannot assure you that we
will generate sufficient revenue to achieve profitability.  Even if we do
achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.  If our revenue
grows more slowly than we anticipate or declines, or if our operating expenses
exceed our expectations or cannot be reduced, we may be unable to achieve or
maintain profitability.

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

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

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

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

                                       18
<PAGE>

 . 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 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 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

                                       19
<PAGE>

personnel from our business operations. In addition, such lawsuits may require
us to pay substantial damages, be prevented from conducting targeted advertising
and aggregating data from our clients' advertising campaigns, and otherwise
seriously harm our business. Furthermore, several Internet-related companies,
including some in the Internet advertising industry, have had claims brought
against them before the Federal Trade Commission, regarding the collection and
use of Internet user information, and we may be subject to similar claims. Such
claims and any other claim by a government entity or other third party against
us regarding our collection and use of Internet user information could seriously
harm our business. See "Legal Proceedings."

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

     Privacy concerns could lead to legislative and other limitations on our
ability to conduct targeted advertising campaigns and compile data that we use
to formulate campaign strategies for our clients.  Our systems use "cookies" and
"action tags" to track Internet users and their online behavior to build
anonymous user profiles.  A cookie is a small file of information stored on a
user's computer that allows us to recognize that user's browser when we serve
advertisements.  An action tag functions similarly to a banner ad, except that
the action tag is not visible.  Our action tags may be placed on specific pages
of our clients' or prospective clients' websites and some Lifecycle E-mails.
This enables our measurement of an advertising campaign's effectiveness to drive
consumers to specific actions.  We are substantially dependent on cookie and
action tag technology to target our clients' advertising campaigns and measure
their effectiveness.  Any reduction in our ability to use cookies or action tags
or other means to build anonymous user profiles could harm our business.
Governmental bodies concerned with the privacy of Internet users have suggested
limiting or eliminating the use of cookies, action tags or user profiling.
Bills aimed at regulating the collection and use of personal data from Internet
users are currently pending in Congress and many state legislatures.  Also, the
Federal Trade Commission and the Department of Commerce have conducted hearings
regarding user profiling, the collection of non-personally identifiable
information and online privacy.  In addition, privacy concerns have led to legal
and technical limitations on the use of cookies, action tags and user profiling
in some jurisdictions.  For example, the European Union has adopted a directive
addressing data privacy that may result in limitations on the collection and use
of information regarding European Internet users.  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 facts relating to the defendant underwriters' compensation
and commissions in connection with our initial public offering.  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

                                       20
<PAGE>

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.

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

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

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

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

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

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

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

                                       21
<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

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

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

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

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

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

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

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

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

                                       22
<PAGE>

 . 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., E-Dialog, Inc. and Message Media, Inc.; and

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

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

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

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


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

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

                                       23
<PAGE>

     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 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.

     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;

                                       24
<PAGE>

 .  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 might inconsistently regulate our activities or
the activities of advertising networks or Web sites. Any of these developments
could harm our business.

                                       25
<PAGE>

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

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

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

     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 July 27, 2001,
the closing price of our common stock ranged from $0.68 to $10.63 per share. The
market price of our common stock may fluctuate significantly in response to a
number of factors, including:

 .  quarterly variations in our operating results;

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

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

                                       26
<PAGE>

 .  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.

                                       27
<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.

                          PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    We are currently the subject of two 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. The plaintiffs seek declaratory and
injunctive relief as well as monetary damages and disgorgement of profits that
Avenue A has received in connection with the alleged illegal practices.
Plaintiffs have moved for class certification and we have filed an opposition to
that motion. We have also filed a motion for summary judgment, requesting that
the Court dismiss plaintiffs' federal claims and decline jurisdiction over
plaintiffs' state claims. A trial date has been set for June 2002.

  In 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.

                                       28
<PAGE>

  We are currently aware of five lawsuits alleging 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.

  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, Nicholas 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, Nicholas 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) 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

                                       29
<PAGE>

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 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. (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 complaints allege that the Securities and Exchange Commission
and/or other regulatory authorities are investigating matters similar to those
alleged in the complaints, but we have no knowledge as to whether any such
purported investigations pertain to us or our initial public offering.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

  (d) Use of Proceeds

  On February 28, 2000, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 as filed with the Commission in
connection with our initial public offering of common stock, par value $0.01 per
share. The offering was co-managed by Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Thomas Weisel Partners LLC. Pursuant to the registration
statement, we registered and sold an aggregate of 6,037,500 shares of common
stock for a gross aggregate offering price of $144.9 million. In connection with
the offering, we incurred total expenses of approximately $12.4 million,
including underwriting discounts and commissions of approximately $10.1 million.
All of these expenses were direct or indirect payments to others and not
payments to our directors or officers (or their associates) or to our affiliates
or 10% shareholders.

  As of June 30, 2001, we have used $13.0 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our Annual Meeting of Shareholders on May 30, 2001. The proposals voted
upon and the results of the voting are as follows:

     1.   The following nominees for election as Directors, each to hold office
          for a three-year term as defined in the proxy statement relating to
          the Annual Meeting and until his successor is duly elected and
          qualified, received not less than 35,105,265 votes, which represents
          97.35% of the

                                       30
<PAGE>

          shares voted. Each nominee received the number of votes set forth
          opposite his respective name:

                         Nominee                 For            Withheld
                         -------                 ---            --------
                    Gregory B. Maffei         35,105,265         956,886

                    Peter M. Neupert          35,268,310         793,841

     2.   The following nominees for election as Directors, each to hold office
          for a two-year term as defined in the proxy statement relating to the
          Annual Meeting and until his successor is duly elected and qualified,
          received not less than 35,105,265 votes, which represents 97.35% of
          the shares voted. Each nominee received the number of votes set forth
          opposite his respective name:

                         Nominee                 For            Withheld
                         -------                 ---            --------
                       Jason Green            35,282,960         779,191

                    Fredric W. Harman         35,283,100         779,051

     3.   The following nominees for election as Directors, each to hold office
          for a one-year term as defined in the proxy statement relating to the
          Annual Meeting and until his successor is duly elected and qualified,
          received not less than 35,105,265 votes, which represents 97.35% of
          the shares voted. Each nominee received the number of votes set forth
          opposite his respective name:

                         Nominee                 For            Withheld
                         -------                 ---            --------
                    Nicolas J. Hanauer        35,283,610         778,541

                    Brian P. McAndrews        35,261,278         800,873

All of these nominees were elected as Directors for the term set forth in the
Proxy Statement.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

      10.1 Amended and Restated Promissory Note between the registrant and
           Michael Galgon, dated July 16, 2001
      10.2 Amended and Restated Promissory Note between the registrant and Clark
           Kokich, dated July 16, 2001
      10.3 Amended and Restated Promissory Note between the registrant and
           Jeffrey Miller, dated July 25, 2001
      10.4 Amended and Restated Promissory Note between the registrant and Brian
           McAndrews, dated July 25, 2001
      10.5 Separation Agreement between the registrant and Neve Savage, dated
           August 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 lawsuits 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. A
      copy of our press release announcing these matters was attached and
      incorporated by reference therein.

                                      31
<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 August 14, 2001.

                         AVENUE A, INC.


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

                                       32
<PAGE>

                               INDEX TO EXHIBITS


  Exhibit
  -------
  Number                          Description
  ------   ---------------------------------------------------------------
   10.1    Amended and Restated Promissory Note between the registrant and
           Michael Galgon, dated July 16, 2001

   10.2    Amended and Restated Promissory Note between the registrant and
           Clark Kokich, dated July 16, 2001

   10.3    Amended and Restated Promissory Note between the registrant and
           Jeffrey Miller, dated July 25, 2001

   10.4    Amended and Restated Promissory Note between the registrant and
           Brian McAndrews, dated July 25, 2001

   10.5    Separation Agreement between the registrant and Neve Savage, dated
           August 2, 2001