<PAGE> 1

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

                                    FORM 10-Q

                                   (Mark One)

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

                 For the quarterly period ended : March 31, 1999

                                       or

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

                        For the transition period from to

                         Commission File Number: 0-23753

                                   CDnow, Inc.
             (Exact name of registrant as specified in its charter)


            Pennsylvania                                 23-2979814
   (State or other jurisdiction of          (I.R.S. Employer Identification No.)
    incorporation of organization)               


                 1005 Virginia Drive, Fort Washington, PA 19034
              (Address of principal executive offices and Zip Code)

                                 (215) 619-9900
              (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 [ ]

Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of May 12, 1999: 30,104,659 shares of common stock, no par value

<PAGE> 2

                                   CDnow, Inc.

                                      INDEX
                                                                              
                                                                            Page
Part I -     Financial Information

Item 1.   Financial Statements

Unaudited Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998..............................................................3

Unaudited Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998..................................................4

Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998........................................................5

Notes to Unaudited Consolidated Financial Statements...........................6

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

Item 3.   Quantitative and Qualitative Disclosures About Market Risk..........11

Part II-  Other Information

          ITEM 1. Legal Proceedings...........................................17
          ITEM 2. Changes in Securities and Use of Proceeds...................18
          ITEM 3. Defaults Upon Senior Securities.............................19
          ITEM 4. Submission of Matters to a Vote of Security Holders.........19
          ITEM 5. Other Information...........................................19
          ITEM 6. Exhibits and Reports on Form 8-K............................19


Signatures....................................................................20


<PAGE> 3


                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                          CDNOW, INC. AND SUBSIDIARIES
                      UNAUDITED CONSOLIDATED BALANCE SHEETS
                                   
<TABLE>
<CAPTION>


                                                                     March 31, 1999     December 31, 1998
                                                                    -----------------   -----------------  
                             ASSETS
                             ------ 
<S>                                                                   <C>                 <C>
CURRENT ASSETS:
  Cash and cash equivalents                                           $ 61,977,165        $ 49,041,370 
  Accounts receivable (net of reserves of $816,964 and $299,991)         3,437,046             839,672 
  Prepaid expenses and other                                            11,973,451           8,322,889
                                                                    -----------------   -----------------
     Total current assets                                               77,387,662          58,203,931
                                                                    -----------------   -----------------
  Property and equipment, net                                           16,413,339           6,643,995 
  Goodwill and other intangibles, net                                   93,981,806                  --       
  Other assets                                                           2,589,231           4,195,717
                                                                    -----------------   -----------------
                                                                      $190,372,038        $ 69,043,643
                                                                    =================   =================  
              LIABILITIES AND STOCKHOLDERS' EQUITY
              ------------------------------------

CURRENT LIABILITIES:
  Current portion of long term debt                                   $  1,080,449        $    822,043 
  Accounts payable                                                      16,545,546          10,306,323 
  Accrued merger costs                                                   7,630,017                  --   
  Accrued expenses and other current liabilities                        16,227,887           4,667,395
                                                                    -----------------   -----------------       
     Total current liabilities                                          41,483,899          15,795,761
                                                                    -----------------   -----------------
Long term debt                                                           1,845,058           1,750,892 
Common stock subject to put rights                                       2,999,995                  --       
Deferred rent liabilities                                                  674,181             358,053

COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, 50,000,000 and 20,000,000
  shares authorized, no shares issued and outstanding                           --                  --
Common stock, no par value, 200,000,000 and 50,000,000 
  shares authorized, 30,086,132 and 17,842,975 issued 
  and outstanding                                                      204,116,720         102,137,536 
Additional paid-in capital                                              13,607,006           4,325,817 
Deferred compensation                                                     (140,523)           (216,913)
Accumulated deficit                                                    (74,214,298)        (55,107,503)
                                                                    -----------------   -----------------
     Total stockholders' equity                                        143,368,905          51,138,937
                                                                    -----------------   -----------------
                                                                      $190,372,038        $ 69,043,643
                                                                    =================   =================
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE> 4



                          CDNOW, INC. AND SUBSIDIARIES
                 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   
<TABLE>
<CAPTION>

                                                       Three Months Ended March 31,
                                                       -----------------------------
                                                           1999            1998
                                                       -------------   -------------
<S>                                                    <C>             <C>
Net sales                                              $ 22,842,869    $ 10,013,889 
Cost of sales                                            17,983,574       8,278,347
                                                       -------------   -------------
    Gross profit                                          4,859,295       1,735,542 

Operating expenses:
  Operating and development                               3,726,182       1,081,049 
  Sales and marketing                                    18,051,182       9,061,926 
  General and administrative                              1,371,356         850,285 
  Amortization of goodwill and other intangibles          1,337,626              --
                                                       -------------   -------------
      Total operating expenses                           24,486,346      10,993,260 
                                                       -------------   -------------

  Operating loss                                        (19,627,051)     (9,257,718)
                                                       -------------   -------------
Interest and other income                                   628,122         506,039 
Interest expense                                           (104,620)       (446,514)
                                                       -------------   -------------
  Loss from continuing operations                       (19,103,549)     (9,198,193)

Net loss                                                (19,103,549)     (9,198,193)
                                                       -------------   -------------

Accretion of preferred stock to redemption value                 --        (115,542)

Net loss applicable to common shareholders             $(19,103,549)   $ (9,313,735)
                                                       =============   =============
Basic and diluted loss per common share:
  Net loss per common share                            $      (0.96)   $      (0.78)
                                                       =============   =============
Weighted average number of shares outstanding            19,826,161      12,015,090
                                                       =============   =============
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE> 5


                          CDNOW, INC AND SUBSIDIARIES.
                 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  
<TABLE>
<CAPTION>


                                                            Three Months Ended
                                                                  March 31,
                                                       -------------------------------
                                                            1999             1998
                                                       --------------   --------------
<S>                                                    <C>              <C>                                                      
Operating Activities:
  Netloss                                              $ (19,103,549)   $  (9,198,193)
  Adjustments to reconcile net loss to net cash 
    used in operating activities:
  Depreciation and amortization                            2,245,317          517,408
  Increase in operating assets and liabilities:
    Accounts receivable                                   (1,095,272)        (240,556)
    Prepaid expenses and other                                94,196          (62,471)
    Accounts payable                                       1,197,544       (3,108,000)
    Accrued expenses                                       1,931,021          440,709
    Deferred revenue                                          49,691          (64,151)
    Deferred rent liability                                  316,128           44,583
                                                       --------------   --------------
      Net cash used in operating activities              (14,364,924)     (11,670,671)
                                                       --------------   --------------
                                    
Investing Activities:
  Sales and maturities of short-term investments                  --        1,003,045
  Purchases of property and equipment                       (544,009)        (713,786)
  Cash acquired in acquisition                            27,783,893               --
                                                       --------------   --------------
      Net cash provided by investing activities           27,239,884          289,259
                                                       --------------   --------------
                                    
Financing Activities:
  Payments on term loans payable                             (14,482)         (14,252)
  Repayment of Series A Notes and warrants                        --       (5,777,500)
  Repayment of advances due to related parties                    --           (3,261)
  Payments on capitalized lease obligations                 (231,347)         (66,267)
  Proceeds from warrants exercised                           102,352               --
  Proceeds from options exercised                            204,312               --
  Proceeds from issuance of Common stock, net                     --       67,077,862
                                                       --------------   --------------
      Net cash provided by financing activities               60,835       61,216,582
                                                       --------------   --------------                                 
Increase in cash and cash equivalents                     12,935,795       49,835,170
Cash and cash equivalents, beginning of period            49,041,370       10,686,001
                                                       --------------   --------------
Cash and cash equivalents, end of period               $  61,977,165    $  60,521,171
                                                       ==============   ==============
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE> 6



                          CDNOW, INC AND SUBSIDIARIES.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  


NOTE 1 -- BASIS OF PRESENTATION

The accompanying  unaudited  consolidated  financial statements are presented in
accordance  with the  requirements  for Form  10-Q  and do not  include  all the
disclosures  required by generally accepted  accounting  principles for complete
financial  statements.  Reference  should be made to the Form 10-K as of and for
the year  ended  December  31,  1998  for  CDnow,  Inc.  and  subsidiaries  (the
"Company")  for  additional  disclosures  including  a summary of the  Company's
accounting policies.

In the opinion of management,  the consolidated financial statements contain all
adjustments,  consisting of normal recurring  adjustments,  necessary to present
fairly the  consolidated  financial  position  of the  Company  for the  periods
presented. The interim operating results of the Company may not be indicative of
operating results for the full year or for any other interim periods.

NOTE 2 -- THE COMPANY

The Company is one of the leading electronic commerce retailers of compact discs
("CDs") and other  entertainment-related  products.  The Company's  revenues are
almost entirely  derived from the sale of pre-recorded  music and  music-related
products. The Company contracts with outside vendors for fulfillment services to
deliver its products to customers.

Since  inception  (February  12,  1994),  the Company has  incurred  significant
losses,  and as of March 31, 1999 had accumulated  losses of $74.2 million.  For
the three months ended March 31, 1999 and the year ended  December 31, 1998, the
Company's net losses were $19.1  million and $43.9  million,  respectively.  The
Company  intends to  continue  investing  heavily in  marketing  and  promotion,
Internet site development and technology,  and development of its administrative
organization.  As a result,  the  Company  believes  it will  continue  to incur
substantial operating losses for the foreseeable future. Because the Company has
relatively  low product gross  margins,  achieving  profitability  given planned
spending  levels  depends  upon the  Company's  ability to generate  and sustain
substantially  increased  revenue and gross  margins.  There can be no assurance
that the Company will be able to generate  sufficient  revenues or gross margins
to achieve or sustain profitability in the future.

On October 22, 1998, CDnow and N2K Inc., a Delaware corporation, entered into an
Agreement and Plan of Merger (the "Merger Agreement"). The parties created a new
public  company,  initially  named  CDnow/N2K,  Inc.  ("CDnow/N2K").  The Merger
Agreement provided for the merger (the "Merger") of wholly-owned subsidiaries of
CDnow/N2K  into each of CDnow and N2K.  CDnow and N2K  survived  the  Merger and
became wholly-owned  subsidiaries of CDnow/N2K.  In the Merger, each outstanding
share of common stock of CDnow was  converted  into one share of  CDnow/N2K  and
each  outstanding  share of common stock of N2K was converted into .83 shares of
CDnow/N2K.  As a result,  the shareholders of CDnow own approximately 60% of the
combined  company  and  the  stockholders  of N2K own  approximately  40% of the
combined company.  The Merger was completed on March 17, 1999, and CDnow/N2K was
renamed CDnow, Inc., also on that date.

NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.  The consolidated  financial statements include the
accounts of the  Company and its wholly  owned  subsidiaries.  All  intercompany
balances and transactions have been eliminated in consolidation.

<PAGE> 7

Reclassifications.  The consolidated financial statements for prior periods have
been reclassified to conform with the current period's presentation.

Management's  Use of  Estimates.  The  preparation  of financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities,  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.

Net Loss Per Common Share.  The Company has presented net loss per share amounts
for the three month  periods ended March 31, 1999 and 1998 pursuant to Statement
of Financial  Accounting Standards ("SFAS") No. 128 "Earnings per Share" and the
Securities and Exchange Commission Staff Accounting Bulletin No. 98.

Basic and diluted loss per share was computed by dividing net loss applicable to
common  shareholders  by the weighted  average  number of shares of Common stock
outstanding  during the three months ended March 31, 1999 and 1998. Diluted loss
per share is the same amount as basic  earnings per share  because the impact on
loss per share  using the  treasury  stock  method is  anti-dilutive  due to the
Company's losses.

Cash and Cash  Equivalents.  For the purposes of the consolidated  balance sheet
and statement of cash flows, the Company considers  investment  instruments with
an  original  maturity  of three  months  or less to be cash  equivalents.  Cash
equivalents  are  comprised of  investments  in money market  funds,  government
mortgage backed bonds and highly rated corporate securities.

Common Stock Subject to Put Rights.  America Online,  Inc.  ("AOL") and N2K Inc.
("N2K"),  a  predecessor-in-interest  to and, as of the merger of CDnow and N2K,
which  occurred on March 17, 1999, a wholly-owned  subsidiary of CDnow,  entered
into an  agreement,  pursuant  to which AOL agreed to  purchase  from N2K at the
initial public offering price per share of $19.00 (less  underwriting  discounts
and commissions) an aggregate  amount of  approximately  $3.0 million or 169,779
shares of N2K's Common stock (the "AOL Purchase").  Subsequent to the Merger the
price per  share  converted  to $22.89  and the  number of shares  converted  to
140,916  share of CDnow common  stock.  N2K granted AOL certain  shelf and other
registration  rights  with  respect  to the shares  purchased  by AOL in the AOL
Purchase, including the right to require N2K to register such shares for resale,
to have such registration  statement  declared  effective on or before April 16,
1998 and to maintain the  effectiveness  of such  registration  statement  for a
period of two years from the  consummation  of the AOL Purchase.  As N2K had not
caused such registration  statement to be declared  effective by April 16, 1998,
AOL has the right to require the Company, as a successor-in-interest  to N2K, to
repurchase  such shares for cash at a price equal to the greater of the original
purchase price therefor and the then-current fair market value. Accordingly, the
value of these shares is not included in Stockholders'  equity.  The fair market
value of the  Company's  common  stock as of May 12,  1999 was $20.44 per common
share. As of May 12, 1999,  these shares had not been registered and AOL had not
exercised its put right. The Common stock subject to put rights on the Company's
consolidated  balance  sheets  will be accreted to its fair value based upon the
price of the  Company's  stock at each  reporting  date.  The fair value will be
recorded as a charge to retained earnings at each reporting date and will reduce
earnings  available  to Common  shareholders.  As of May 12,  1999,  there is no
charge as the market  value of the  Company's  common  stock is below $22.89 per
Common share.

The $3.0  million  for the AOL  Purchase  was being held by AOL in a  segregated
account.  On December  16,  1998,  N2K and AOL agreed to offset $3.0  million in
marketing advances which N2K owed to AOL as of November 1, 1998 against the $3.0
million AOL owed to N2K under this agreement.

<PAGE> 8

Revenue  Recognition.  Net sales, which consist primarily of recorded music sold
via the  Internet,  include  shipping and handling  charged to customers and are
recognized  when the  products are  shipped.  The Company  records a reserve for
estimated returns, which is based on historical return rates.

Operating and Development  Expense.  Operating and development  expense consists
primarily  of  payroll  and  related  expenses  for  store  management,  design,
development and network  operations  personnel,  systems and  telecommunications
infrastructure  and  royalties  paid by the  Company  on CD sales in return  for
licensing of ratings, reviews, sound samples and other information.

Advertising  Expense.  Advertising  costs are  included  in sales and  marketing
expenses and are charged to expense as incurred.  Such costs were  approximately
$13.4  million and  approximately  $7.3 million for the three months ended March
31, 1999 and 1998,  respectively.  The Company  gives credit to the providers of
various small Internet sites through its Cosmic Credit Program. Expenses related
to this  program  are  included  in sales and  marketing  expenses.  The Company
estimates  the amount of unused  credits  and  includes  this  amount in accrued
expenses.

NOTE 4 -- COMMITMENTS AND CONTINGENCIES

Payments  Under  Marketing  Agreements.  Under the Company's  current  marketing
agreements, the Company is required to pay aggregate minimum fixed fees of $30.4
million,  $20.0  million,  and $7.2 million  during the remaining nine months of
1999 and the years ending December 31, 2000 and 2001, respectively.

The  Company  expects  to  amortize  the  costs  associated  with its  marketing
agreements over the contract terms, with the amortization method primarily based
on the rate of delivery of certain  guarantees  (impressions,  click-throughs or
customers) to be received during the contract term.

General. Many of the Company's marketing  agreements,  including but not limited
to the AOL, Yahoo!, Excite, Lycos/Tripod, Lycos Bertelsmann, WebCrawler, MTV/VH1
and Rolling Stone agreements,  contain  provisions which may require  additional
payments to be made by the Company based on factors such as  click-throughs  and
new  customers  generated.  To date,  the amount of such  payments  has not been
material.  Such payments are expensed as incurred.  The Company will continue to
evaluate the realizability of assets recorded, and if necessary,  write down the
assets to their net realizable value.

NOTE 5 - ACQUISITION

On March 17, 1999,  the Company  completed its merger with N2K by acquiring 100%
of N2K's  capital  stock for  12,159,249  shares of the  Company's  common stock
valued at  approximately  $101,834,000  and  warrants  and  options to  purchase
1,713,644   shares  of  the  Company's  common  stock  valued  at  approximately
$9,281,000.  CDnow  was  the  acquiring  entity  for  accounting  purposes.  The
acquisition  has been  accounted  for under the purchase  method of  accounting,
whereby the purchase  price has been  allocated to the assets  purchased and the
liabilities   assumed  based  on  their  fair  market  values  at  the  date  of
acquisition.  The excess of the purchase price over the net assets  acquired was
recorded as goodwill and other  intangibles.  The following  table indicates the
preliminary  allocation  of  excess  purchase  price and  expected  amortization
periods:

<TABLE>
<CAPTION>

          Intangible Assets:                 Assigned Value     Amortization Period
---------------------------------------      --------------     -------------------
<S>                                          <C>                      <C>
Web site technology                          $    4,000,000           2 years
Strategic alliances/customers                    19,000,000           3 years
Assembled workforce                               2,200,000           3 years                                                  
Goodwill                                         69,286,000           3 years
                                             --------------
Total goodwill and other intangibles         $   94,486,000
</TABLE>

<PAGE> 9

For  the  three  months  ended  March  31,   1999,   amortization   expense  was
approximately  $1,338,000.  There was no  amortization in the three month period
ended March 31, 1998. Accumulated amortization as of March 31, 1999 and December
31, 1998 was approximately $1,541,000 and $203,000, respectively.

If the acquisition had occurred on January 1, 1998, pro forma revenue,  net loss
and loss per common  share would have been as set forth in the  following  table
for the three months ended March 31, 1999 and 1998, respectively:

<TABLE>
<CAPTION>

                                  Three Months Ended March 31,
                                          (Pro forma)
                                --------------------------------
                                     1999              1998
                                --------------    --------------   
<S>                             <C>               <C>
Revenue                         $   36,327,248    $   16,341,852
Net loss                        $   38,241,262    $   31,057,742
Loss per common share           $         1.28    $         1.28

</TABLE>

<PAGE> 10


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

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly  Report contain  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  These  forward-looking  statements  are  subject  to  certain  risks  and
uncertainties  that  could  cause  actual  results  to  differ  materially  from
historical  and  anticipated  results  or other  expectations  expressed  in the
Company's  forward-looking  statements.  Such forward-looking  statements may be
identified  by the use of certain  forward-looking  terminology,  such as "may,"
will,"  "expect,"  "anticipate",  "intend,"  "estimate,"  "believe,"  "goal," or
"continue"  or comparable  terminology  that  involves  risks or  uncertainties.
Actual  future  results and trends may differ  materially  from  historical  and
anticipated  results,  which  may  occur as a result  of a  variety  of  factors
including,  but not limited to, those set forth under  "Overview" and "Liquidity
and Capital  Resources"  included in  Management's  Discussion  and  Analysis of
Financial  Condition and Results of  Operations  section of this document and in
the "Risk Factors"  section of the Company's  Definitive Proxy Statement on Form
14A (File No.  000-23753),  which was filed  with the  Securities  and  Exchange
Commission ("SEC") on February 17, 1999.  Particular attention should be paid to
the cautionary statements involving the Company's limited operating history, the
unpredictability  of its future revenues,  the unpredictable and evolving nature
of its key markets, the intensely  competitive online commerce and entertainment
environments,  the  Company's  dependence on its  marketing  agreements  and key
suppliers and distributors,  and the risks associated with capacity constraints,
systems  development,  relationships  with artists and the management of growth.
Except as required by law, the Company  undertakes  no  obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise.  Readers  should  carefully  review the factors set forth in other
reports or documents that the Company files from  time-to-time  with the SEC and
matters generally affecting online commerce and online music retailing.

RECENT DEVELOPMENTS

Acquisition  of N2K Inc. On October  22,  1998,  CDnow and N2K Inc.,  a Delaware
corporation,  entered  into  an  Agreement  and  Plan  of  Merger  (the  "Merger
Agreement"). The parties created a new public company, initially named CDnow/N2K
Inc. ("CDnow/N2K").  The Merger Agreement provided for the merger (the "Merger")
of wholly-owned  subsidiaries of CDnow/N2K into each of CDnow and N2K. CDnow and
N2K survived the Merger and became  wholly-owned  subsidiaries of CDnow/N2K.  In
the Merger,  each outstanding  share of common stock of CDnow was converted into
one share of  CDnow/N2K  and each  outstanding  share of common stock of N2K was
converted into .83 shares of CDnow/N2K.  As a result,  the shareholders of CDnow
own  approximately  60% of the combined  company and the stockholders of N2K own
approximately 40% of the combined company. The Merger was completed on March 17,
1999 and CDnow/N2K was renamed CDnow, Inc. (the "Company"), on that date.

OVERVIEW

The Company is one of the leading electronic commerce retailers of CDs and other
entertainment-related  products. Its early entry into the online music retailing
industry  has  helped  the  Company  gain a  well-recognized  brand  and a large
customer base. The Company  strives to combine the advantages of online commerce
with superior customer focus in order to be the authoritative source for CDs and
other  music-related  products.  The Company's online store,  CDnow.com,  offers
broad  selection,   informative  content,   easy-to-use  navigation  and  search
capabilities,  a  high  level  of  customer  service,  competitive  pricing  and
personalized  merchandising  and  recommendations.  Due to the Company's  retail
focus,  revenues are primarily  derived from the sale of pre-recorded  music and
related  products,  drawing from its  comprehensive  selection of  approximately
500,000 items. The Company also sells  advertising space and sponsorships on its
site to companies  interested  in promoting  their own goods and services to the
Company's  customer  base and the large number of visitors to the  Company's web
site.
<PAGE>  11

The  Company  has grown  rapidly  since  its  inception  in 1994.  Approximately
2,000,000  customers  have  made  purchases  from  either  CDnow  or from  Music
Boulevard,  the  Internet  music  retail  store  operated  by N2K,  since  their
inception  through  March 31,  1999,  of whom  approximately  420,000 made their
initial purchase during the three months ended March 31, 1999. The Company's net
sales  grew to $22.8  million,  including  $3.1  million  in net sales  from the
acquisition  of N2K, in the first  quarter of 1999  compared to $10.0 million in
the first quarter of 1998. The Company has also generated  significant  customer
loyalty.  Despite the  Company's  rapid  acquisition  of new  customers,  repeat
customers  accounted for  approximately 60% of net sales in the first quarter of
1999, up from approximately 51% in the first quarter of 1998.

The Company  believes that the key factors  affecting  its  long-term  financial
success include its ability to obtain new customers at reasonable costs,  retain
customers  and  encourage  repeat  purchases.  The  Company  seeks to expand its
customer base through multiple marketing channels, which include (i) pursuing an
aggressive  marketing  campaign  using a combination  of online and  traditional
marketing,  (ii) establishing  marketing  agreements with major Internet content
and service  providers,  (iii)  entering  into linking  arrangements  with other
Internet  sites as part of its  Cosmic  Credit  Program  and (iv)  using  direct
marketing  techniques  to target new and existing  customers  with  personalized
communications.  The Company has entered into marketing  agreements  with, among
others, AOL, Yahoo!, Excite, Netscape, Lycos,  Lycos-Bertelsmann,  Rolling Stone
Network and MTV/VH1.

Since its inception,  the Company has incurred significant net losses and, as of
March 31, 1999, had accumulated  losses of $74.2 million.  As it seeks to expand
aggressively,  the Company believes that its operating expenses will continue at
a high level as a result of the financial commitments related to the development
of marketing  channels,  future  marketing  agreements,  and improvements to its
Internet site and other capital  expenditures.  The Company expects that it will
continue to incur losses and generate negative cash flow from operations for the
foreseeable  future as it continues to develop its  business.  Since the Company
has relatively low product gross margins, the ability of the Company to generate
and enhance profitability depends upon its ability to substantially increase its
net sales. To the extent that significantly  higher net sales do not result from
the  Company's  marketing  efforts,  the Company  will be  materially  adversely
affected.  There can be no  assurance  that the Company will be able to generate
sufficient  revenues  from  the  sale  of CDs  and  other  entertainment-related
products to achieve or maintain profitability on a quarterly or annual basis.

For the  quarter  ended  March 31, 1999 and the year ended  December  31,  1998,
international  sales  accounted  for  approximately  22% and  21% of net  sales,
respectively. The Company expects that net sales from international markets will
continue to represent a significant portion of total net sales.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

Currently,  all of the Company's revenues and expenses are denominated in United
States dollars.  Therefore,  the only current  exposure to foreign currency risk
relates to  international  sales.  For the quarter  ended March 31, 1999 and the
year ended December 31, 1998,  international  sales accounted for  approximately
22% and 21% of net  sales,  respectively.  To the  extent  that the value of the
United States dollar  increases  relative to foreign  currencies,  the amount of
foreign  currency  needed to obtain United States dollars to make purchases will
increase,  and it  will be  more  costly  for  international  customers  to make
purchases.  Therefore  changes  in  exchange  rates may impact the amount of the
Company's international sales.

<PAGE> 12 

INTEREST RATE RISK

The Company's  exposure to market risk as a result of changes in interest  rates
relates  primarily  to  its  investment   portfolio.   The  Company  invests  in
instruments  that  meet high  credit  quality  standards,  as  specified  in its
investment policy.  This policy also limits the amount of credit exposure to any
one issue, issuer and type of investment.

As of March 31, 1999, all of the Company's funds were cash  equivalents.  Due to
the average  maturity and  conservative  nature of its investment  portfolio,  a
sudden change in interest rates would not have a material effect on the value of
the portfolio.  Management estimates that had the average yield of the Company's
investments decreased by 100 basis points, the Company's interest income for the
three  months ended March 31, 1999 would have  decreased by less than  $150,000.
This  estimate  assumes that the decrease  occurred on the first day of 1999 and
reduced the yield of each investment  instrument by 100 basis points. The impact
on the Company's future interest income from future changes in investment yields
will  depend  largely  on the gross  amount of the  Company's  investments,  see
"Liquidity and Capital Resources".

RESULTS  OF OPERATIONS

The following  table sets forth  statement of operations data as a percentage of
net sales for the periods indicated:

<TABLE>
<CAPTION>

                                                       Three Months Ended March 31,
                                                       ----------------------------
                                                           1999            1998
                                                       ------------    ------------
<S>                                                    <C>             <C>
Net Sales                                                 100.0%          100.0%
Cost of sales                                              78.7            82.7
                                                       ------------    ------------
    Gross profit                                           21.3            17.3
Operating Expenses:
  Operating and development                                16.3            10.8
  Sales and marketing                                      79.0            90.5
  General and administrative                                6.0             8.5
  Amortization of goodwill and other intangibles            5.9             0.0
                                                       ------------    ------------
  Total operating expense                                 107.2           109.8
                                                       ------------    ------------
    Operating loss                                        (85.9)          (92.5)
Interest income (expense), net                              2.3             0.6
                                                       ------------    ------------
Net loss                                                  (83.6)%         (91.9)%
                                                       ============    ============
</TABLE>

During the quarter ended  September 30, 1998, the Company  determined to include
credit card processing fees ("Credit Card Fees") in sales and marketing expenses
rather than in cost of sales,  as was previously the case.  This change was made
based on management's determination that including Credit Card Fees in sales and
marketing  expense was more  consistent  with the  treatment of such expenses by
retailers generally.  The financial information in this Form 10-Q related to the
Company's  results of operations  for the quarter ended March 31, 1998, has been
restated to reflect this change.  Credit Card Fees were  $444,000 and  $276,000,
during the three months ended March 31, 1999 and 1998,  respectively.  If Credit
Card Fees were included in cost of sales,  gross profit  margins would have been
19.3%  and  14.6%,  during  the three  months  ended  March  31,  1999 and 1998,
respectively.

<PAGE> 13

Net Sales. Net sales primarily reflects the sale of CDs and other  entertainment
related products,  net of estimated returns,  and includes outbound shipping and
handling charges.  Net sales were $22.8 million for the three months ended March
31,  1999,  representing  an increase of 128% over the  corresponding  period in
1998. The increase is attributable to continued growth of the Company's customer
base; repeat purchases from existing customers;  and advertising and sponsorship
revenue in the first quarter of 1999, whereas the Company had no advertising and
sponsorship revenue in the corresponding 1998 quarter.  Net sales also increased
as the result of the  inclusion  in 1999 results of $3.1 million of revenue from
N2K's Music Boulevard  Internet site following the merger on March 17, 1999. For
the three months ended March 31, 1999, the Company added  approximately  420,000
new  customers,  including  new  customers of Music  Boulevard  added during the
quarter,  bringing  the total  number of  customers  who have made  purchases at
either CDnow or Music Boulevard since inception to approximately 2,000,000 as of
March 31, 1999. Repeat customer purchases  represented  approximately 60% of net
sales for the three months  ended March 31, 1999,  compared to 51% for the three
months ended March 31, 1998.  International  sales  represented 22% of net sales
for the three months ended March 31, 1999 compared to 21% for the  corresponding
period in 1998.  The Company  believes that the slight  change in  international
sales as a percentage of net sales in the quarter was not significant.

Cost of Sales. Cost of sales consists  primarily of the cost of merchandise sold
to customers,  including product  fulfillment and outbound shipping and handling
charges.  Cost of sales were $18.0  million for the three months ended March 31,
1999,  compared  to $8.3  million  for the  corresponding  period  in 1998.  The
Company's  gross  profit  margin  increased  to 21.3% for the three months ended
March 31,  1999,  compared to 17.3% for the  corresponding  period in 1998.  The
increase in gross margin was primarily  attributable  to an increase in revenues
from the sale of advertising  on the CDnow site,  which has a higher margin than
product sales.

Operating and Development  Expense.  Operating and development  expense consists
primarily  of  payroll  and  related  expenses  for  store  management,  design,
development and network  operations  personnel,  systems and  telecommunications
infrastructure,  and  royalties  paid by the  Company  on CD sales in return for
licensing  of  ratings,  reviews,  sound  samples and other  information.  Store
development costs are charged to expense as incurred.  Operating and development
expense was $3.7 million for the three  months ended March 31, 1999  compared to
$1.1 million for the corresponding period in 1998. As a percentage of net sales,
operating and development expense was 16.3% for the three months ended March 31,
1999,  compared to 10.8% for the three months ended March 31, 1998. The increase
in both dollars and percentage  terms is attributable to increased  staffing and
associated  costs  related to enhancing  the features and  functionality  of the
Company's Internet site and transaction-processing systems, as well as increased
investment in store content and systems and telecommunications infrastructure to
support the increased  transaction  volume in the CDnow store.  The inclusion of
N2K expenses of $555,000  after March 17, 1999 also  accounted  for a portion of
the increase.

Sales and Marketing  Expense.  Sales and marketing expense consists primarily of
payments related to marketing agreements,  advertising and promotion, as well as
payroll and related  expenses for personnel  engaged in  marketing,  selling and
customer service activities. Sales and marketing expenses were $18.1 million for
the three months  ended March 31,  1999,  compared to $9.1 million for the three
months ended March 31, 1998. As a percentage  of net sales,  sales and marketing
expense  decreased to 79.0% for the three months ended March 31, 1999,  compared
to 90.5% for the three  months  ended March 31,  1998.  The increase in absolute
dollars was  primarily  attributable  to  increased  costs  associated  with the
Company's  marketing  agreements,  several of which were  entered into after the
first quarter of 1998;  advertising  and production  costs  associated  with the
Company's advertising on the 1999 Grammy Awards telecast in February 1999, which
were  higher than the  comparable  costs for the 1998  Grammy  Awards  telecast;
increased  promotional  expenditures,  and  inclusion  of N2K  expenses  of $1.8
million after March 17, 1999. The decrease as a percentage of sales is primarily

<PAGE> 14

attributable  to the increased  percentage  of the  Company's  sales from repeat
customer  purchases,  which  are  relatively  less  expensive  than  the cost of
acquiring new customers.  The Company increased its advertising expense to $13.4
million for the three months ended March 31, 1999,  compared to $7.3 million for
the three  months  ended March 31,  1998.  In  addition,  the  Company  incurred
increased  staffing and related costs in connection with the  implementation  of
its marketing strategy and customer service activities  necessary to support its
increased  customer base, and increased  credit card  processing fees related to
the growth of revenues.

The Company expects the dollar amount of sales and marketing expense to continue
to increase in future  periods.  While the Company is hopeful that its net sales
will also  increase in future  periods so that its sales and  marketing  expense
will represent a decreasing  percentage of net sales, the Company is not able to
predict  whether its net sales will increase by a sufficient  amount for this to
occur.  No assurance  can be given that the Company will achieve  increased  net
sales or that sales and  marketing  expense will decrease as a percentage of net
sales.

General and Administrative Expense.  General and administrative expense consists
of payroll and related  expenses for executive,  accounting  and  administrative
personnel,  insurance,   professional  fees  and  other  general  and  corporate
expenses.  General and  administrative  expense  was $1.4  million for the three
months  ended March 31,  1999,  compared to $850,000  for the three months ended
March 31, 1998. The increase in general and administrative expense was primarily
due to the hiring of additional personnel and increases in professional fees. As
a percentage of net sales, general and administrative  expense decreased to 6.0%
for the three months ended March 31, 1999,  from 8.5% for the three months ended
March 31, 1998, as the Company's  fixed costs were spread over a larger  revenue
base.

Amortization  of Goodwill and Other  Intangibles.  Amortization  of goodwill and
other  intangibles  related to the acquisition of N2K and superSonic  Boom, Inc.
was $1.3 million for the three  months  ended March 31, 1999.  There was no such
expense for the three months ended March 31, 1998.

Net Loss Applicable to Common Shareholders. The Company's net loss applicable to
common  shareholders  was $19.1 million for the three months ended March 31,1999
compared to $9.3 million for the three months ended March 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1999,  the Company's cash and cash  equivalents  were $62.0 million
compared to $49.0  million at December 31, 1998. In February  1998,  the Company
consummated  its initial  public  offering by selling an  aggregate of 4,561,250
shares of Common Stock and raising net proceeds of approximately  $67.0 million.
In July 1998,  the Company  consummated a second  public  offering by selling an
aggregate  of  1,250,000  shares of Common  Stock and  raising  net  proceeds of
approximately  $21.5  million.  Prior to February  1998,  the Company  primarily
financed its operations  through private sales of capital stock (which,  through
December 31, 1997, totaled $10.5 million,  including $9.3 million raised in July
and  August of 1997),  the  private  sale of $5.8  million  of Series A Notes in
November 1997, internally-generated cash flow, advances from related parties and
certain other short-term loans.

Net cash used in  operating  activities  of $14.4  million for the three  months
ended March 31, 1999 was primarily  attributable  to a net loss of $19.1 million
and an  increase  of $1.1  million  in  accounts  receivable,  due to  increased
revenues,  particularly  advertising  revenues.  These  increases were partially
offset by a $3.1 million increase in accounts payable and accrued expenses,  due
to an increase in accrued  merchandise  costs,  and $2.2 million in depreciation
and  amortization,  which includes $1.3 million of  amortization of goodwill and
other intangible  assets  associated with the merger with N2K. These changes are
exclusive  of the assets  acquired  and  liabilities  assumed from N2K as of the
merger  date,  March 17, 1999.  For the three months ended March 31, 1998,  cash
used in operating activities of $11.7 million resulted primarily from a net loss
of $9.2 million, a decrease of $3.1 million in accounts payable, and an increase
of  $241,000  in  accounts  receivable,  partially  offset by  depreciation  and
amortization of $517,000.

<PAGE> 15

Net cash provided by investing activities was $27.2 million for the three months
ended March 31, 1999, which consisted of $27.8 million in cash acquired from the
acquisition of N2K, partially offset by purchases of equipment of $544,000.  Net
cash  provided by  investing  activities  of $289,000 for the three months ended
March 31, 1998 was  attributable  to the sale of short-term  investments of $1.0
million, partially offset by purchases of equipment of $714,000.

Net cash provided by financing activities was $61,000 for the three months ended
March 31, 1999, and consisted of proceeds from warrants and options exercised of
$307,000,  partially offset by payments on capital leases of $231,000.  Net cash
provided by financing  activities  was $61.2  million for the three months ended
March 31, 1998,  and  consisted of net proceeds of  approximately  $67.1 million
from the Company's  initial public offering,  partially offset by the retirement
of $5.8 million of the Company's Series A Notes.

The Company is required to pay aggregate  minimum  fixed fees of $30.4  million,
$20.0 million and $7.2 million  during the remaining nine months of 1999 and the
years  ended  December  31,  2000 and 2001,  respectively,  under the  Company's
marketing agreements.

The Company expects to fund its future payment  obligations  under its marketing
agreements  from its cash and cash  equivalents  and from  cash  generated  from
future  operations and financing  activities.  As of March 31, 1999, the Company
had $62.0 million of cash and cash  equivalents.  As of that date, the Company's
principal commitments consisted of obligations under its marketing agreements as
well as obligations outstanding under capital and operating leases. Although the
Company has no material  commitments  for capital  expenditures,  it anticipates
substantial   increases  in  its  capital  expenditures  and  lease  commitments
consistent with anticipated growth in operations, infrastructure and personnel.

FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS

The  Company  expects  to  experience  significant  fluctuations  in its  future
quarterly  operating  results  due to a variety  of  factors,  many of which are
outside the Company's control.  Factors that may affect the Company's  quarterly
operating results include (i) its ability to retain existing customers,  attract
new  customers  and  maintain  customer   satisfaction,   (ii)  its  ability  to
successfully  integrate  the  operations  and  technology  of N2K into the CDnow
store,  (iii) its ability to convince customers of N2K's Music Boulevard to shop
at the new CDnow  store,  (iv) the  introduction  of new or enhanced  Web pages,
services,  products and marketing agreements by the Company and its competitors,
(v) price competition or higher wholesale  prices,  (vi) the level of use of the
Internet  and consumer  acceptance  of the Internet for the purchase of recorded
music, (vii) seasonality of recorded music sales,  (viii) its ability to upgrade
and develop its systems and infrastructure and attract qualified personnel, (ix)
technical  difficulties,  system downtime or Internet brownouts,  (x) the amount
and timing of operating costs and capital expenditures  relating to expansion of
the  Company's  business,  operations  and  infrastructure,  (xi) the  timing of
Company  promotions and sales programs,  (xii) the level of merchandise  returns
experienced  by the Company,  (xiii)  government  regulation  and (xiv)  general
economic  conditions  and economic  conditions  specific to the Internet and the
music  industry.  These and other  factors are  included  in the "Risk  Factors"
section  of the  Company's  Definitive  Proxy  Statement  on Form 14A  (File No.
000-23753), which was filed with the SEC on February 17, 1999.

The  Company  expects  that  it will  experience  seasonality  in its  business,
reflecting  a  combination  of  seasonal  fluctuations  in  Internet  usage  and
traditional retail seasonality patterns affecting sales of recorded music. Sales
in the traditional retail music industry are significantly  higher in the fourth
calendar quarter of each year than in the preceding three-quarters.  However, to
date, the Company's limited operating history and rapid growth make it difficult
to ascertain the effects of  seasonality on its business.  The Company  believes
that  period-to-period  comparisons of the Company's  historical results are not
necessarily  meaningful and should not be relied upon as an indication of future
results.

<PAGE> 16

Risks  Associated  with the Year  2000.  The Year  2000  issue is the  result of
computer  programs being written using two digits rather than four to define the
applicable  year. In other words,  date-sensitive  software may recognize a date
using  "00" as the year 1900  rather  than the year 2000.  This could  result in
system failures or miscalculations causing disruptions of operations, including,
among others, a temporary inability to process  transactions,  send invoices, or
engage in similar normal business activities.

The Company  does not  believe  that it has  material  exposure to the Year 2000
issue with respect to its own information  technology since its existing systems
correctly  define  the  year  2000.  The  Company's  non-information  technology
systems,  which  include,  but are not limited  to,  systems  such as  security,
heating, ventilating and air conditioning systems and facsimile machines are not
considered by the Company to be date sensitive to the Year 2000 and,  therefore,
do not raise Year 2000 issues.

The Company is currently conducting an analysis to determine the extent to which
its major suppliers' systems (insofar as they relate to the Company's business),
including,   but  not  limited  to,  the  systems  of  credit  card  processors,
telecommunications  providers,  product distributors and companies with whom the

Company has strategic alliances, are subject to the Year 2000 issue. The Company
is  currently  unable to  predict  the  extent to which the Year 2000 issue will
affect  its  suppliers,  or the  extent to which it would be  vulnerable  to the
suppliers'  failure to  remediate  any Year 2000 issues on a timely  basis.  The
failure of a major supplier subject to the Year 2000 to convert its systems on a
timely basis or a conversion  that is  incompatible  with the Company's  systems
could have a material  adverse effect on the Company.  In addition,  most of the
purchases  from the Company's  store are made with credit cards via the Internet
and the Company's  operations may be materially adversely affected to the extent
its customers are unable to use their credit cards or access the Internet due to
the Year 2000 issues that are not  rectified  by their credit card vendors or by
those  organizations  responsible for  maintaining  and providing  access to the
Internet.

The Company  estimates  that, as of March 31, 1999, the cost of remediating  its
internal systems has been approximately  $100,000, and it estimates that it will
spend an  additional  $100,000  during the  remainder  of 1999.  The  Company is
funding this effort through normal working capital.

The  Company  intends to  actively  work with and  encourage  its  suppliers  to
minimize the risks of business  disruptions  resulting from Year 2000 issues and
develop contingency plans where necessary.  Such plans may include,  but are not
limited to, using  alternative  suppliers  and  establishing  contingent  supply
arrangements. The Company expects to have such plans in place by June 30, 1999.


<PAGE> 17


                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

N2K and its directors are defendants in a consolidated purported class action in
the U.S. District Court for the Southern District of New York entitled In re N2K
Inc.  Securities  Litigation  (Docket  No. 98 CIV 3304 (HB)) (the  "Consolidated
Action").  The  Consolidated  Action  consolidates  two purported class actions,
entitled  Kuhn v. N2K Inc.  et al.  (Docket  No. 98 CIV 4360 (HB)) and Bender v.
Rosen et al.  (Docket No. 98 CIV 3304 (HB)) that were  previously  discussed  in
N2K's Quarterly  Reports on Form 10-Q for the quarterly  periods ended September
30,  1998,  June 30, 1998 and March 31,  1998,  respectively.  The  Consolidated
Action is a purported class action on behalf of Common stockholders and seeks to
recover  unspecified  damages and other relief, as well as recovery of costs and
expenses,  stemming from alleged  violations of the  Securities  Act of 1933, as
amended,  in connection  with the public  offering of the shares of N2K's Common
stock in April 1998. The  Consolidated  Action alleges that, among other things,
the defendants  failed to disclose N2K's first quarter  financial results in the
registration  statement for the April 1998 public  offering.  The Company,  as a
successor-in-interest  to N2K,  believes  that the  claims  in the  Consolidated
Action are without merit and is vigorously  defending the action. The defendants
moved to dismiss the  complaint  on August 31, 1998 for failure to state a claim
and/or for failure to plead fraud with the requisite  particularity.  The motion
to dismiss has been fully briefed and is awaiting decision.

On or about October 27, 1998, an action  entitled  Rubin v. Rosen et al. (Docket
No.  16743NC) was filed  against N2K,  its  directors  and CDnow in the Chancery
Court of Delaware for the County of New Castle.  The Rubin action is a purported
class action on behalf of all Common stockholders of N2K, alleging,  inter alia,
that the  consideration to be received by the purported class in connection with
the proposed merger  transaction  between N2K and CDnow (the "Merger") is unfair
and  grossly  inadequate  and  that the  individual  defendants  breached  their
fiduciary duties in connection with the Merger. The plaintiffs agreed to and the
court approved a stipulation of dismissal of this action on March 19, 1999.

On or about November 4, 1998, an action entitled  Ticketmaster  Ticketing Co. v.
N2K Inc.  (Docket No.  BC200194) was filed  against N2K in  California  Superior
Court for the County of Los Angeles.  The  Ticketmaster  action alleges that N2K
breached a marketing  and  advertising  contract  dated  April 23, 1998  between
Ticketmaster and N2K, which N2K terminated  effective October 31, 1998, based on
alleged  breaches of the  agreement by  Ticketmaster  as well as other  tortious
conduct.  Ticketmaster seeks damages in an amount not less than $8,000,000, plus
pre- and post-judgment  interest,  as well as fees and costs. The Company,  as a
successor-in-interest  to N2K, believes that it has substantial  defenses to the
claim  asserted,  intends  to  defend  the  action  vigorously  and has  filed a
cross-compliant for affirmative relief.

On or about November 12, 1998, an action  entitled  Metallica v. N2K Inc. et al.
(Docket No. 98-9122 GHK (ANx)) was filed in the United States District Court for
the Central  District of  California  against N2K,  Metro  Independent  Records,
Richard Driscoll, Dutch East India Trading, and ten unnamed persons or entities.
The Metallica  action alleges that N2K and the other  defendants  have infringed
copyrights and trademarks owned by Metallica and the other  plaintiff,  Creeping
Death  Music,  and  have  violated   California  state  law  by   manufacturing,
distributing,  advertising and selling a compact disc entitled  "Metallica,  Bay
Area Thrashers, The Early Years." Plaintiffs seek, inter alia, injunctive relief
including,  but not limited  to, an order  requiring  defendants  to cease their
alleged  copyright  and  trademark  infringements,  damages,  including  but not
limited to treble plaintiffs'  damages and defendants'  profits  attributable to
the alleged infringements,  other damages and injunctive relief, as well as fees
and costs. The Company,  as a  successor-in-interest  to N2K,  believes that the
claims  against it are without  merit and  expects  such claims will be resolved
through  negotiation  with the plaintiffs and without material adverse effect to
the Company.

<PAGE> 18

N2K and 17 other  entities  have  been  named as  defendants  in a civil  action
entitled Interactive Gift Express v. Compuserve, Inc., et al. (Docket 95 CV 6871
(BSJ)), which is pending in the U.S. District Court for the Southern District of
New York. N2K has also been named as defendant in a civil action entitled Parsec
Sight/Sound,  Inc. v. N2K Inc. (Docket 98 CV 0118), which is pending in the U.S.
District Court for the Western District of Pennsylvania.  The plaintiffs in each
of these actions allege  infringement of certain  intellectual  property rights,
and each seeks treble  damages and costs in an  unspecified  amount,  as well as
other  declaratory and injunctive  relief.  In the Interactive Gift action,  the
court has issued a preliminary  ruling favorable to defendants.  Plaintiffs have
stated  that they will  consent to entry of  judgment  against  them in order to
speed their appeal of the court's ruling. In the Parsec action,  the Company has
answered  the   complaint  and   discovery  is  ongoing.   The  Company,   as  a
successor-in-interest to N2K, believes that the claims against it in each action
are  without  merit and  intends  to  vigorously  defend  against  each of them.
Moreover,   the  Company  believes  that  these  lawsuits,   even  if  adversely
determined,  will not have a material adverse effect on the Company's  business,
financial condition or results of operations.

From time to time,  the  Company is  involved in  litigation  incidental  to its
business.  In the opinion of  management,  no litigation to which the Company is
currently a party is likely to have a material  adverse  effect on the Company's
results of operations, financial condition or liquidity, if decided adversely to
the Company.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On February 13, 1998, the Company consummated its initial public offering of its
common stock, no par value. The registration statement relating to this offering
(File No.  333-41241)  was declared  effective on February 9, 1998.  On July 28,
1998, the Company  consummated a secondary  public offering of its common stock.
The registration  statement  relating to this offering (File No.  333-52367) was
declared effective on July 28, 1998.

The total  remaining net offering  proceeds to the Company  after  deducting the
foregoing  discounts,  commissions,  fees and expenses of $88,550,906 were fully
expended  during the three months ended March 31, 1999. An estimate of how these
proceeds  were used by the Company  during the period  February 9, 1998  through
March 31, 1999 is as follows:

<TABLE>

                                                      
<S>                                                 <C>                                                    
Improvements to Company internet site and 
   other capital expenditures                       $  3,132,062
Acquisition of other businesses                          423,694
Repayment of indebtedness                              5,775,500
Sales and marketing expenses                          57,296,941
Marketing Agreements                                  17,743,500
Working capital                                        4,179,209
                                                    ------------
Total                                               $ 88,550,906

</TABLE>

<PAGE> 19

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At   a   special   meeting   of   the   stockholders   of   CDnow,   Inc.,   the
predecessor-in-interest  to the Company,  held on March 17, 1999,  the following
proposals were adopted by the margins indicated:

1.   To approve the Amended and Restated  Agreement  and Plan of Merger dated as
     of January 29, 1999 by and among N2K Inc.,  CDnow,  Inc. and Exit 8 Holding
     Company.

     Number of shares FOR: 9,896,996; AGAINST: 27,105; ABSTAIN: 9,340

2.   To approve the CDnow/N2K, Inc. 1999 Equity Compensation Plan.

     Number of shares FOR: 9,812,694; AGAINST: 51,067; ABSTAIN: 23,155

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A.    EXHIBITS

      27.1  Financial Data Schedule.

B.    Reports on Form 8-K

<TABLE>
<CAPTION>

        Form       Item #                 Description                      Filing Date    
      --------     ------     --------------------------------------      --------------
      <S>           <C>       <C>                                         <C> 
      Form 8-K      5,7       Completion of the merger with N2K Inc.      March 19, 1999
</TABLE>


<PAGE> 20


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.



                                   CDnow, Inc.



Date:  May 12, 1999
                                                        /s/ Jason Olim      
                                                    ----------------------------
                                                                      Jason Olim
                                                                     President &
                                                         Chief Executive Officer

                                                        /s/ Joel Sussman    
                                                    ----------------------------
                                                                    Joel Sussman
                                                       Vice President, Treasurer
                                                     and Chief Financial Officer