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

This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. The following Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company should be read in conjunction with the Consolidated Financial Statements and notes related thereto included in this Quarterly Report on Form 10-Q. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

Overview

We were incorporated in Delaware on February 2, 1999 under the name I.T. Technology Inc. In January 2003, we changed our corporate name to Avenue Group, Inc. We are engaged in oil and gas exploration and development. We own 100% of Avenue Energy Israel LTD ("AEI") which in turn owns 100% of the Heletz-Kokhav license and 50% of the Iris License in Israel, two petroleum exploration licenses in the State of Israel. Our wholly-owned operating subsidiary, Avenue Energy, Inc, owns 100% of Avenue Appalachia, Inc., a Delaware company, which has a 10% General Partner interest and a 31.8% Limited Partner interest in Avenue Appalachia 2006 LP, a partnership formed in 2006.

Our strategy is to acquire and develop a portfolio of oil and gas assets. This includes the generation and acquisition of low risk drilling opportunities in the US and to acquire entry-level high impact oil and gas reserves abroad.

During the nine months ended September 30, 2008, our activities were principally devoted to our oil and gas operations in Israel and to the pursuit to acquire oil and gas exploration and production property in the US and abroad.

In September 2007 the Petroleum Commissioner of Israel formally issued to AEI 100% of the Heletz-Kokhav license covering a large part of the Heletz Field. In February 2008, the Petroleum Commissioner of Israel issued to AEI 50% of the Iris license covering the remaining part of the Heletz Field. Lapidoth-Heletz LP, a limited partnership listed on the Tel Aviv stock exchange, was issued the other 50% of the Iris License. According to the terms of the licenses, we agreed to a work program over the next three years that will consist of field studies, well workovers, shooting seismic and the drilling of a new well. If we fail in implementing the work program, it may cause us to lose our interest in the licenses. We may request the conversion of the license to a 30 year production lease in the event of a substantial increase in daily production that occurs as a result of the work program. We estimate the work program expenditures at approximately $4,500,000.

On April 3, 2008, we completed an agreement with TomCo Energy Plc ("TomCo") pursuant to which TomCo earned a 50% net working interest (after deduction of certain expenses and royalties) in the Heletz-Kokhav license, by assuming 100% of the costs associated with implementing the three year work program up to $3.5 million. In addition, at closing TomCo paid us $1 million and an additional equivalent of $500,000 in TomCo restricted shares. The agreement also sets forth certain payments to be made by TomCo which are contingent upon our successful conversion of the Heletz-Kokhav license into a production lease and recoverable reserves being certified at 10 million barrels or more as verified by an independent geologist. As of September 30, 2008, TomCo had advanced us a total of $2,727,121 of cash (included $75,000 as a security deposit) and $500,000 of common stock (equivalent to 12,618,615 shares). As of September 30, 2008, we recorded a valuation allowance of $289,004 associated with the TomCo stock received.

On June 12, 2008, oil production was restarted from the Heletz-Kokhav license in the Heletz field. As of September 30 2008, three wells were re-opened for production and producing around 46 bopd ("Barrels of Oil Per Day") in aggregate.

On September 15, 2008, workover operations commenced on The K27 well and was completed on October 6, 2008. The well was cleaned out and known producing formations were re-perforated. It has taken several days to pump the drilling fluid and for the well to clean itself out. Avenue expects the production rate for K27 to stabilize at a rate of 10-15 bopd and estimated recoverable reserves of 28,600 barrels of oil.

We continue to focus our activities on re-developing the Heletz field. This includes restarting the six wells that were shut in by Lapidoth as of May 2007, reviewing plugged wells that are candidates for workovers and collecting and reviewing field and production data for additional upside opportunities.

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Results of Operations

For the three months and nine months ended September 30, 2008 compared to three months and nine months ended September 30, 2007.

During the nine months ended September 30, 2008, our activity was principally devoted to oil and gas activities in the State of Israel arising out of the granting of the Heletz Field license by the Israel Petroleum Commission.

We generated $655 in net revenues for the three months ended September 30, 2008, versus $12,753 in net revenues for the three months ended September 30, 2007. We generated $6,132 in net revenues for the nine months ended September 30, 2008, versus $40,755 in net revenues for the nine months ended September 30, 2007. The decrease in revenue is primarily due a reduction of production by JKX Oil & Gas PLC from the Karakilise lease.

Net losses for the three and nine months ended September 30, 2008 were $801,099 and $3,157,050 compared to net losses of $452,273 and $829,770 for the three and nine months ended September 30, 2007, respectively. Total operating expenses for the three and nine months ended September 30, 2008, increased by $562,147 and $2,528,697, respectively. This increase is predominantly a result of an increase in operating expenses with our Heletz-Kokhav license, legal fees and compensation expense.

Liquidity and Capital Resources

We have generated losses from inception and anticipate that we will continue to incur significant losses until, at the earliest, we can generate sufficient revenue to offset the substantial up-front capital expenditures and operating cost associated with establishing, attracting and retaining a significant business base. As of September 30, 2008, we had net losses of $3,157,050 and negative cash flows from operations of $1,805,399 and $396,205 for the nine months ended September 30, 2008 and 2007, respectively. We had accumulated deficits of $37,398,172 and $34,241,122 as of September 30, 2008 and December 31, 2007, respectively. We cannot offer any assurance that we will be able to generate significant revenue or achieve profitable operations.

The capital requirements relating to implementation of our business plan will be significant. As of September 30, 2008, we had cash of $141,551 and a working capital deficit of $2,955,588 as compared to $9,918 in cash and working capital of $555,397 as of December 31, 2007.

Our cash and cash equivalents increased by $131,633 from $9,918 as of December 31, 2007 to $141,551 as of September 30, 2008. The increase in cash and cash equivalents was a result of loan from TomCo amounting to $250,000 and a cash advance from TomCo for $1.8 million.

During the next twelve months, our business plan contemplates that we further develop our oil and gas activities. To date we have been dependent on the proceeds of private placements of our debt and equity securities and other financings in order to implement our operations.

We plan to rely on the proceeds from farm-outs, new debt or equity financing to finance our ongoing operations. We anticipate requiring significant additional capital in order to fund our anticipated oil and gas related activities in the State of Israel and in Appalachia, the acquisition and exploration of oil and gas leases and licenses located elsewhere and to fund corporate overhead expenditures. We intend to continue to seek additional capital in order to meet our cash flow and working capital requirements. We anticipate that we will need additional capital to fund our anticipated operations for the next 12 months, depending on revenues from operations. We do not have any contracts or commitments for financing at this time. There is no assurance that we will be successful in achieving any such financing or raising sufficient capital to fund our operations and pursue further development. There can be no assurance that any such financing will be available to us on commercially reasonable terms, if at all. If we are not successful in sourcing significant additional capital in the near future, we will be required to significantly curtail or cease ongoing operations and consider alternatives that would have a material adverse affect on our business, results of operations and financial condition. In such event we may need to relinquish most, if not all of our ongoing oil and gas rights and licenses.

Critical Accounting Policies and Estimates

We review the status of our oil and gas property periodically to determine if an impairment of our property is necessary. We follow the guidance in paragraphs 28 and 31 of FASB Statement 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, requiring periodic assessments for impairment of unproved properties and exploratory well cost when reserves are not found. In the impairment test we compare the expected undiscounted future net revenue on a field-by-field basis with the related net capitalized cost at the end of each period. Should the net capitalized cost exceed the undiscounted future net revenue of a property, we write down the cost of the property to fair value, which we determine using estimates of discounted future net revenue. We provide an impairment allowance on a property-by-property basis when we determine that unproved property will not be developed.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

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Investment in Oil and Gas Properties

We utilize the full cost method to account for our investment in oil and gas properties. Accordingly, all costs associated with acquisition and exploration of oil and gas reserves, including such costs as leasehold acquisition costs, interest costs relating to unproven properties, geological expenditures and direct internal costs are capitalized into the full cost pool. We had two countries with proved reserves. For our proved oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Investments in unproven properties and major development projects including capitalized interest, if any, are not amortized until proved reserves associated with the projects can be determined. If the future exploration of unproven properties is determined uneconomical, the amounts of such properties are added to the capitalized cost to be amortized. The capitalized costs included in the full cost pool are subject to a ceiling test.

Asset Retirement Obligations

We recognize a liability for future retirement obligations associated with our oil and gas properties. The estimated fair value of the asset retirement obligation is based on the current estimated cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate. This liability is capitalized as part of the cost of the related asset and amortized over its useful life. The liability accretes until we settle the obligation. The costs are estimated by management based on its knowledge of industry practices, current laws and past experiences. The costs could increase significantly from management's current estimate.

Stock-Based Compensation

We record compensation expense in the consolidated financial statements for stock options granted to employees, consultants and directors using the fair value method. Fair values are determined using the Black Scholes option pricing model, which is sensitive to the estimate of the Company's stock price volatility and the options expected life. Compensation costs are recognized over the vesting period.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115". This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157, "Fair Value Measurements". The adoption of this statement is not expected to have a material effect on the Company's financial statements.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51". This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on our financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement. The adoption of this statement is not expected to have a material effect on our financial statements.