<PAGE>

                                  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, 2000

                                       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)

                 (Former name, former address and former fiscal
                       year, if changed since last report)

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 9, 2000: 32,805,598 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, 2000 and
          December 31, 1999....................................................3

          Unaudited Consolidated Statements of Operations for the three months
          ended March 31, 2000 and 1999........................................4

          Unaudited Consolidated Statements of Cash Flows for the three months
          ended March 31, 2000 and 1999........................................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........14

Part II - Other Information

          ITEM 1. Legal Proceedings...........................................15
          ITEM 2. Changes in Securities and Use of Proceeds...................16
          ITEM 3. Defaults Upon Senior Securities.............................16
          ITEM 4. Submission of Matters to a Vote of Security Holders.........16
          ITEM 5. Other Information...........................................16
          ITEM 6. Exhibits and Reports on Form 8-K............................16

Signatures....................................................................17


<PAGE> 3

                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                          CDNOW, INC. AND SUBSIDIARIES
                      UNAUDITED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    March 31, 2000     December 31, 1999
                                                                   -----------------   -----------------

                                ASSETS
                                ------
<S>                                                                <C>                 <C>
CURRENT ASSETS:
    Cash and cash equivalents                                      $     28,697,041    $     20,612,706
    Accounts receivable, net                                              4,044,191           4,809,931
    Prepaid expenses and other                                            3,906,483           5,580,241
                                                                   -----------------   -----------------
          Total current assets                                           36,647,715          31,002,878
                                                                   -----------------   -----------------
    Property and equipment, net                                          15,072,250          17,216,980
    Goodwill and other intangibles, net                                  61,855,131          70,121,321
    Other assets                                                            985,903           1,201,809
                                                                   -----------------   -----------------
                                                                   $    114,560,999    $    119,542,988
                                                                   =================   =================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

CURRENT LIABILITIES:
    Current portion of long-term debt                              $     1,681,548     $      1,670,838
    Accounts payable                                                    34,853,551           46,431,122
    Accrued N2K, Inc. merger costs                                       3,120,414            4,300,117
    Accrued expenses and other current liabilities                      19,774,220           15,753,572
                                                                   ----------------    -----------------
          Total current liabilities                                     59,429,733           68,155,649
                                                                   ----------------    -----------------

Long-term debt                                                           2,184,995            2,629,359
Deferred rent and other long-term liabilities                            1,813,491              992,696
Long-term convertible debt                                              20,000,000                   --
Common stock subject to put rights                                       2,999,995            2,999,995

COMMITMENTS AND CONTINGENCIES (Note 6)

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, 32,789,876 and 30,355,948 issued
 and outstanding                                                       225,714,264          204,573,908
Additional paid-in capital                                              14,613,729           14,589,814
Deferred compensation                                                      (45,184)             (61,905)
Accumulated deficit                                                   (212,150,024)        (174,336,528)
                                                                   ----------------    -----------------
          Total stockholders' equity                                    28,132,785           44,765,289
                                                                   ----------------    -----------------
                                                                   $   114,560,999     $    119,542,988
                                                                   ================    =================

</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,
                                                  ------------------------------
                                                       2000            1999
                                                  -------------    -------------
<S>                                               <C>              <C>
Net sales                                         $ 43,583,149     $ 21,930,361
Cost of sales                                       36,104,016       17,983,574
                                                  -------------    -------------
    Gross profit                                     7,479,133        3,946,787

Operating expenses:
  Operating and development                         10,589,380        3,726,182
  Sales and marketing                               23,521,878       17,138,674
  General and administrative                         2,949,508        1,371,356
  Amortization of goodwill and other intangibles     8,197,023        1,337,626
                                                  -------------    -------------
      Total operating expenses                      45,257,789       23,573,838
                                                  -------------    -------------
  Operating loss                                   (37,778,656)     (19,627,051)

Interest and other income                              322,098          628,122
Interest expense                                      (356,938)        (104,620)
                                                  -------------    -------------

Net Loss                                           (37,813,496)     (19,103,549)
                                                  =============    =============
Basic and diluted loss per common share:
  Net loss per common share                       $      (1.23)    $      (0.96)
                                                  =============    =============
Weighted average number of shares outstanding     $ 30,742,241     $ 19,826,161
                                                  =============    =============

</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,
                                                                 --------------------------------
                                                                      2000              1999
                                                                 --------------    --------------
       <S>                                                       <C>               <C>
Operating Activities:
  Net loss                                                       $ (37,813,496)    $ (19,103,549)
    Adjustments to reconcile net loss to
      net cash used in operating activities;
    Depreciation and amortization                                    9,989,478         2,245,317
    Net loss on fixed asset disposals                                1,310,488                --
    Common stock options issued for services rendered                   23,915                --
  Increase (decrease) in operating assets and liabilities:
    Accounts receivable                                                765,740          (981,141)
    Prepaid expenses and other                                       1,989,639            94,196
    Accounts payable                                               (11,577,571)        1,197,544
    Accrued expenses                                                 3,046,433         1,816,890
    Deferred revenue                                                   513,704            49,691
    Deferred rent liability                                             70,795           316,128
                                                                 --------------     -------------
    Net cash used in operating activities                          (31,680,875)      (14,364,924)
                                                                 --------------     -------------
Investing Activities:
  Purchases of property and equipment                                 (941,492)         (544,009)
  Cash acquired in acquisition                                              --        27,783,893
                                                                 --------------     -------------
    Net cash provided by (used in) investing activities               (941,492)       27,239,884
                                                                 --------------     -------------

Financing Activities:
  Payments on term loans payable                                       (13,267)          (14,482)
  Proceeds from the sale of stock                                   21,000,000                --
  Proceeds from convertible debt                                    20,000,000                --
  Payments on capitalized lease obligations                           (420,387)         (231,347)
  Proceeds from warrants exercised                                          --           102,352
  Proceeds from options exercised                                      140,356           204,312
                                                                 --------------     -------------
    Net cash provided by financing activities                       40,706,702            60,835
                                                                 --------------     -------------
  Increase in cash and cash equivalents                              8,084,335        12,935,795
  Cash and cash equivalents, beginning of period                    20,612,706        49,041,370
                                                                 --------------     -------------
  Cash and cash equivalents, end of period                       $  28,697,041      $ 61,977,165
                                                                 ==============     =============

</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, 1999 for CDnow, Inc. and subsidiaries for additional
disclosures including a complete summary of CDNOW'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 CDNOW for the periods presented.
The  interim  operating  results  of CDNOW may not be  indicative  of  operating
results for the full year or for any other interim period.

NOTE 2 -- THE COMPANY

CDNOW is a leading electronic commerce retailer of pre-recorded music, including
compact discs (CDs), digital downloads and other entertainment-related products.
CDNOW's  revenues  are  derived  from  the  sale of  pre-recorded  music,  other
entertainment-related  products and  advertising  on the cdnow.com  site.  CDNOW
contracts with outside vendors for fulfillment  services to deliver its products
to customers.

Since inception (February 12, 1994), CDNOW has incurred  significant losses, and
as of March 31, 2000 had  accumulated  losses of $212.2  million.  For the three
months ended March 31, 2000 and 1999,  CDNOW's net losses were $37.8 million and
$19.1 million, respectively. In addition, CDNOW had a working capital deficit of
$22.8  million as of March 31, 2000.  CDNOW  believes it will  continue to incur
substantial  operating  losses for the  foreseeable  future.  Because  CDNOW has
relatively low product gross margins,  achieving  profitability depends upon its
ability to  generate  and  sustain  substantially  increased  revenue  and gross
margins.  There  can be no  assurance  that  CDNOW  will  be  able  to  generate
sufficient revenues or gross margins to achieve or sustain  profitability in the
future.  In  addition,  CDNOW has  significant  payments  due in 2000 related to
marketing agreements.

CDNOW is currently  financing  its working  capital needs with cash derived from
revenues,  funds  from  the  equity  investment  of $21  million  by Sony  Music
Entertainment,  Inc.  ("Sony Music") and Time Warner,  Inc.  ("Time  Warner") on
March 16, 2000, and the long-term  convertible debt facility available from Sony
Music and Time Warner.  CDNOW is actively pursuing other financing  arrangements
and has  retained  Allen & Company and  Deutsche  Bank Alex.  Brown to assist in
exploring its strategic options and alternative  financing  arrangements.  CDNOW
believes that its current cash and cash  equivalents  are sufficient to meet its
payment  obligations until  approximately  September 30, 2000. CDNOW is actively
seeking third party  financing or another  merger  transaction.  However,  CDNOW
cannot assure that it will be able to obtain the financing necessary to continue
operating its business.

NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.  The consolidated  financial statements include the
accounts of CDnow,  Inc. and its wholly owned  subsidiaries.  All  inter-company
balances and transactions have been eliminated.

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

     Beginning in the first  quarter of 2000,  CDNOW has elected to classify the
amount of coupons  redeemed to purchase  merchandise  as a reduction  to revenue
rather than the past  practice of  classifying  coupons as a sales and marketing
expense.  This  change  was  made  based  on  management's   determination  that
classifying coupons as a reduction to revenue was generally more consistent with
the  treatment  of  coupons by  internet  retailers.  Accordingly,  CDNOW made a
reclassification  between net revenues and sales and  marketing  expense for the
quarter  ended March 31,  1999.  Promotional  coupons  were  approximately  $2.8
million  and  $913,000  for the three  months  ended  March  31,  2000 and 1999,
respectively. This adjustment had no effect on net loss.

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. CDNOW has presented net loss per common share amounts
for the three  months  ended  March 31,  2000 and March  31,  1999  pursuant  to
Statement of Financial  Accounting  Standards  ("SFAS")  No. 128  "Earnings  Per
Share."

<PAGE> 7
     Basic and diluted  loss per common  share was computed by dividing net loss
by the weighted  average number of shares of common stock  outstanding.  Diluted
loss per share is the same amount as basic loss per share  because the impact on
loss per share using the treasury stock method is  anti-dilutive  due to CDNOW's
losses.

Prepaid  Expenses.  CDNOW  follows the American  Institute  of Certified  Public
Accountants  Statement of Position 93-7 "Reporting for Advertising  Costs" ("SOP
93-7") to account for its marketing agreements.  Under SOP 93-7, CDNOW amortizes
the costs associated with its marketing agreements over the contract terms, with
the amortization  method primarily based on the rate of delivery of a guaranteed
number of  impressions  to be received  during the contract  term. To the extent
additional   payments  are  required  to  be  made  based  on  factors  such  as
click-throughs and new customers generated, such payments are charged to expense
as incurred.  CDNOW  evaluates  the  realizability  of assets  recorded,  and if
necessary,  writes-down the assets to its net realizable  value. As of March 31,
2000 no such write-down was required.

     Prepaid  expenses  include  approximately  $2.0 million and $3.9 million at
March 31,  2000,  and  December  31,  1999,  respectively,  related to marketing
agreements (see Note 6). Other assets include the long-term portion of marketing
agreements  of  approximately  $554,000  and  $804,000  at March 31,  2000,  and
December 31, 1999, respectively.

Internally  Developed  Systems  and  Software.  CDNOW has adopted  Statement  of
Position  98-1  "Accounting  for the Costs of  Computer  Software  Developed  or
Obtained for Internal  Use" ("SOP 98-1"),  effective for fiscal years  beginning
after December 15, 1998.  Accordingly,  the costs of computer software developed
or obtained  for  internal  use have been  capitalized  and  amortized  over the
estimated  useful life of three years.  At March 31, 2000 and December 31, 1999,
net  capitalized  computer  software  developed or obtained for internal use was
approximately $530,000 and $1.4 million,  respectively.  In the first quarter of
2000,  CDNOW  wrote-off  approximately  $1.3 million of  previously  capitalized
software  costs  related to the  development  of the  Cosmic  Music  Network,  a
content-oriented site associated with the CDNOW store, which focused on unsigned
bands and the promotion of their music.  The decision to discontinue  the Cosmic
Music  Network  was made as part of  CDNOW's  plan to  prioritize  its  spending
following the termination of its proposed merger with Columbia House.

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
a wholly-owned  subsidiary of CDNOW, entered into an agreement pursuant to which
AOL agreed to  purchase  at N2K's  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  of CDNOW  and N2K,  the price per share
converted  to $22.89 and the  number of shares  converted  to 140,916  shares of
CDNOW common stock. N2K granted AOL certain shelf and other registration  rights
with respect to the shares purchased by AOL,  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  CDNOW,  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 or the  then current  fair
market  value.  Accordingly,  the  value  of these  shares  is not  included  in
stockholders' equity.  Presently,  these shares have not been registered and AOL
has not  exercised  its put  right.  The common  stock  subject to put rights on
CDNOW's  consolidated  balance  sheets will be accreted to its fair market value
based upon the price of CDNOW's  common stock at each  reporting  date. The fair
market value will be recorded as a charge to retained earnings at each reporting
date and will reduce earnings available to common shareholders.  The fair market
value of CDNOW's  common stock as of March 31, 2000 was $3.78 per common  share.
As of March 31, 2000,  there was no charge as the market value of CDNOW's common
stock was below $22.89 per common share.

Revenue  Recognition.  Net sales,  which consist primarily of pre-recorded music
and other entertainment-related products sold via the Internet, include shipping
and  handling  charged  to  customers,  and are  recognized  net of  promotional
discounts and coupons when the products are shipped. CDNOW records a reserve for
estimated  returns and  customer  credit,  which is based on  historical  rates.
Revenue from the sale of  advertising on the cdnow.com site is recognized as the
advertising is run.

     CDNOW includes the revenue associated with barter advertising  transactions
in net  sales.  The total  amount of barter  revenue  included  in net sales was
approximately  $630,000  and  $390,000 for the three months ended March 31, 2000
and 1999, respectively.

Operating and Development.  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
fees for licensing of ratings,  reviews,  sound  samples and other  information.
Store maintenance costs are charged to expense as incurred.
<PAGE> 8
Sales and Marketing.  Sales and marketing  expense includes  expenses related to
marketing agreements,  advertising and promotions,  payroll and related expenses
for personnel engaged in marketing,  selling,  and customer service  activities,
including  internal and  external  commissions  and service fees on  advertising
revenue,  and credit card  processing  fees. The expense  associated with barter
advertising revenue is also included in sales and marketing expense. Advertising
costs are included in sales and marketing expenses and are charged to expense as
incurred.  Advertising costs were  approximately $9.8 million and $13.4 million,
for the three  months  ended March 31, 2000 and 1999,  respectively.  CDNOW pays
commissions in the form of merchandise  credit or cash to the affiliate  members
of its Cosmic  Credit and C2 Programs.  Expenses  related to these  programs are
included in sales and marketing expenses.

Comprehensive  Income.  In June 1997, the Financial  Accounting  Standards Board
("FASB")  issued SFAS No. 130,  "Reporting  Comprehensive  Income" ("SFAS 130").
This  statement  requires  companies  to classify  items of other  comprehensive
income by their  nature in a financial  statement  and  display the  accumulated
balance of other  comprehensive  income  separately  from retained  earnings and
additional  paid-in-capital  in the equity  section of a statement  of financial
position. SFAS 130 is effective for financial statements issued for fiscal years
beginning  after December 15, 1997.  CDNOW adopted SFAS 130 in the first quarter
of 1998. CDNOW has had no other comprehensive income items to report.

Segment and Geographic Information.  In June 1997, the FASB issued SFAS No. 131,
"Disclosure  About  Segments of an Enterprise  and Related  Information"  ("SFAS
131"). This statement establishes  additional standards for segment reporting in
the  financial  statements  and is effective  for fiscal years  beginning  after
December 15, 1997.  CDNOW  operates in one  principal  business  segment  across
domestic and  international  markets.  No foreign country or foreign  geographic
area  accounted for more than 10% of net sales in any of the periods  presented.
Substantially all of CDNOW's  operating  results and identifiable  assets are in
the United States.

New  Accounting  Pronouncements.  In December  1999, the Securities and Exchange
Commission  issued Staff Accounting  Bulletin No. 101,  "Revenue  Recognition in
Financial  Statements"  ("SAB 101").  SAB 101 summarizes  certain of the Staff's
views in applying  generally  accepted  accounting  principles  to  recognition,
presentation and disclosure of revenue in financial statements.  Compliance with
SAB 101 was  required  no later  than the  first  quarter  of the  fiscal  years
beginning after December 15, 1999. CDNOW determined that its revenue recognition
policies are in accordance with SAB 101.

NOTE 4 - LONG-TERM CONVERTIBLE DEBT

In  connection  with  CDNOW's  Agreement  of Merger  and  Contribution  ("Merger
Agreement")  with Sony  Corporation of America  ("Sony") and Time Warner,  CDNOW
received a  short-term  loan  commitment  from Sony Music and Time  Warner.  The
short-term  loan  commitment  was to provide  CDNOW with $30  million in working
capital  financing,  drawable,  based  on cash  balance  minimums,  on or  after
December  16,  1999.  On March 13, 2000,  Sony,  Time Warner and CDNOW  mutually
consented  to terminate  the Merger  Agreement  and entered  into a  Termination
Agreement. Under the Termination Agreement, Sony Music and Time Warner converted
the $30 million  short-term  loan commitment  into long-term  convertible  debt.
Borrowings  under the  convertible  loan bear interest at the  six-month  London
interbank  offered  rate in  effect  two days  prior to the  borrowing  plus 3%.
Principal and interest on the borrowings are due no later than January 15, 2003.
CDNOW can make voluntary  prepayments at any time, without penalty.  Prepayments
are mandatory from the proceeds of any sale,  lease,  transfer or disposition of
property  or  equity  securities,   except  under  certain  defined  exceptions,
including  permitted interim financing  involving the issuance of up to 19.9% of
outstanding  shares of CDNOW common stock. Sony Music and Time Warner may at any
time  convert  any portion of the  borrowings  and  accrued  interest  under the
convertible loan into CDNOW common stock at a conversion price of $10 per share.
As collateral,  Time Warner and Sony Music have a first security interest in all
of the assets of CDNOW.  CDNOW had made  borrowings  of $20 million and $0 as of
March 31,  2000 and  December  31,  1999,  respectively.  As of March 31,  2000,
neither Sony Music nor Time Warner had converted  any portion of the  borrowings
or accrued interest into CDNOW common stock.

NOTE 5 - STOCKHOLDERS' EQUITY

As provided by the Termination  Agreement,  Sony Music and Time Warner purchased
2,405,500 shares of CDNOW's common stock, no par value, for $21 million on March
16, 2000.
<PAGE> 9


     On March 20,  2000,  CDNOW  re-priced  issued  and  outstanding  options to
purchase its common stock,  no par value,  held by its  employees,  officers and
certain  members of its Board of  Directors.  Options  having an exercise  price
greater than $5.625,  the closing price of CDNOW common stock on March 20, 2000,
were re-priced to an exercise price of $5.625.  According to FASB Interpretation
No. 44,  "Accounting for Certain  Transactions  involving  Stock  Compensation",
reductions  to the exercise  price of a fixed option award must be accounted for
as  variable  from  the  date of the  modification  to the  date  the  award  is
exercised,  forfeited  or expires  unexercised.  Under  variable  accounting,  a
compensation  cost must be recorded  based on the  intrinsic  value of the award
(i.e.  the  difference  between the exercise price and the fair value of CDNOW's
common  stock  on  the  date  of  the  re-pricing).  Thereafter,  an  additional
compensation  cost must be recorded or reversed based on the difference  between
the value of the option at the beginning and end of the accounting  period.  The
reversal of compensation  cost will not be larger than accumulated  compensation
expense  incurred.  No  compensation  cost  was  recognized  at the  date of the
re-pricing  because the new exercise  price  equaled the market value of CDNOW's
stock at the date of the re-pricing on March 20, 2000. No  compensation  expense
was  recognized at March 31, 2000 because  CDNOW's stock price at March 31, 2000
of $3.7812 was below the new exercise price of $5.625.

NOTE 6 -- COMMITMENTS AND CONTINGENCIES

As of March 31, 2000,  CDNOW's  principal  commitments  consisted of obligations
under its marketing  agreements and  obligations  associated  with leased office
space and capital financing arrangements.

Payments Under Marketing Agreements.  CDNOW is required to pay aggregate minimum
fixed fees of  approximately  $9.6 million and $2.8 million during the remaining
nine months of 2000 and the year ending December 31, 2001,  respectively,  under
its existing marketing agreements.  These minimum fixed fees primarily relate to
CDNOW's  marketing  agreement  with America  Online,  Inc. and the commitment to
purchase a minimum  amount of  advertising  from MTV Networks.  Depending on the
type  of  marketing  agreement,   CDNOW  expenses  advertising  purchased  under
marketing  commitments  when  the  advertising  is run or  amortizes  the  costs
associated  with its marketing  commitments  over the contract  terms,  with the
amortization  method  primarily  based on the rate of delivery  of a  guaranteed
number of impressions to be received during the contract term.

     Several  of  CDNOW's  agreements  contain  provisions,  which  may  require
additional  payments to be made by CDNOW 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 charged to expense as incurred.  CDNOW continues to
evaluate the  realizability  of assets  recorded under the agreements  above and
other  agreements,  and, if necessary,  will write down the assets to realizable
value. As of March 31, 2000 no such write-down was required.

<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 CDNOW'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 the  "Overview"  and  "Liquidity  and Capital
Resources"  sub-sections included in the Management's Discussion and Analysis of
Financial  Condition and Results of  Operations  section of this document and in
the "Risk Factors" section of CDNOW's  Registration  Statement on Form S-4 (File
No.  333-72463),  which was filed with the  Securities  and Exchange  Commission
("SEC")  on  February  16,  1999.  Particular  attention  should  be paid to the
cautionary   statements   involving  CDNOW'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,  CDNOW'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,  CDNOW  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 CDNOW files from  time-to-time with the SEC and matters generally
affecting  online  commerce and online sale of  entertainment-related  products,
including, but not limited to, music retailing.

Recent Developments

On July 12,  1999,  CDNOW  entered  into a Merger  Agreement  with Sony and Time
Warner to combine  its  business  with that of  Columbia  House,  which is owned
equally by Sony and Time Warner.  On March 13, 2000, Sony, Time Warner and CDNOW
mutually  consented to terminate  the  Agreement  and entered into a Termination
Agreement. Under the Termination Agreement, Sony Music and Time Warner purchased
$21 million of CDNOW's common stock (2,405,500  shares),  no par value, on March
16, 2000, and replaced a $30 million short-term loan commitment with $30 million
of long-term  convertible debt, which is convertible at the option of the holder
into CDNOW common stock at $10 per share. Sony, Time Warner,  Columbia House and
CDNOW  also  agreed  to  explore  the  possibilities  of a number  of  strategic
relationships.  On March  14,  2000,  CDNOW  filed a report on Form 8-K with the
Securities and Exchange  Commission  concerning the  termination of the proposed
merger with Columbia House.

Following execution of the Termination Agreement, CDNOW retained Allen & Company
and Deutsche Bank Alex.  Brown to assist in exploring its strategic  options and
alternative  financing  arrangements.  CDNOW  believes that its current cash and
cash  equivalents  are  sufficient  to  meet  its  payment   obligations   until
approximately  September  30,  2000.  CDNOW  is  actively  seeking  third  party
financing or another merger  transaction.  However,  CDNOW cannot assure that it
will be able to  obtain  the  financing  necessary  to  continue  operating  its
business.

Overview.

CDNOW is a leading electronic commerce retailer of pre-recorded music, including
CDs, digital downloads and other entertainment-related products. Its early entry
into the online music retailing industry has helped CDNOW gain a well-recognized
brand and a large  customer  base.  CDNOW  strives to combine the  advantages of
online  commerce with superior  customer focus in order to be the  authoritative
source for the online  purchase  of music.  CDNOW's  Internet  site,  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 CDNOW's retail focus,
revenues are primarily  derived from the sale of pre-recorded  music and related
products.  CDNOW also sells  advertising  space and  sponsorships  to  companies
interested  in promoting  their own goods and services to CDNOW's  customer base
and the large number of visitors to CDNOW's Internet site.

CDNOW  has  grown  rapidly  since  its  founding  in  1994.   Since   inception,
approximately  3.7 million  customers  have made  purchases from either CDNOW or
from Music  Boulevard,  the Internet music retail store  previously  operated by
N2K,  which was  integrated  into the  cdnow.com  Internet site on May 17, 1999.
Approximately  440,000  customers made their initial  purchase  during the three
months ended March 31, 2000.  CDNOW's net sales grew to $43.6 million during the
three months ended March 31, 2000,  compared to $21.9  million  during the three
months ended March 31, 1999.
<PAGE> 11
In addition to the rapid acquisition of new customers,  CDNOW has also generated
significant  sales from  existing  customers.  Repeat  customers  accounted  for
approximately  66% of net sales during the three months ended March 31, 2000, up
from approximately 60% during the three months ended March 31, 1999.

CDNOW believes that the key factors  affecting its long-term  financial  success
include its ability to secure  financing  arrangements,  obtain new customers at
reasonable costs,  retain customers and encourage repeat purchases.  CDNOW seeks
to expand its customer base through multiple marketing  channels,  which include
(i) marketing  campaigns using a combination of online and  traditional  offline
marketing,   consisting  of  print,  television  and  radio  advertising,   (ii)
continuing  marketing  agreements with one or more Internet  content and service
providers, (iii) entering into linking arrangements with other Internet sites as
part  of its  affiliate  website  programs,  and  (iv)  using  direct  marketing
techniques   to   target   new  and   existing   customers   with   personalized
communications. CDNOW periodically enters into marketing agreements with various
Internet  portals and online content  providers.  CDNOW  presently has marketing
agreements in place with, among others, AOL and MTV/VH1.

Since inception,  CDNOW has incurred significant net losses and, as of March 31,
2000,  had  accumulated  losses of $212.2  million.  CDNOW  expects that it will
continue to incur losses and generate negative cash flow from operations for the
foreseeable  future.  Since it has  relatively  low product gross  margins,  the
ability of CDNOW to generate and enhance  profitability depends upon its ability
to substantially increase its net sales. To the extent that significantly higher
net sales and/or alternative financing arrangements are not realized, CDNOW will
be materially  adversely affected.  There can be no assurance that CDNOW will be
able to generate sufficient  revenues to achieve or maintain  profitability on a
quarterly or annual basis or that CDNOW will secure adequate funding to continue
its operations.


Results of Operations.

Net Sales. Net sales primarily reflect the sale of pre-recorded  music and other
entertainment-related   products,   including  outbound  shipping  and  handling
charges.  Net sales are net of a reserve  for  estimated  returns  and  customer
credits,  promotional discounts and coupons. Revenues from the sale of both cash
and barter  advertising on CDNOW's Internet site are also included in net sales.
Net  sales  were  $43.6  million  for the three  months  ended  March 31,  2000,
representing  an increase of 99% over the three months ended March 31, 1999. Net
sales for the three  months  ended  March 31,  2000  include  the sales to Music
Boulevard customers as a result of the acquisition of N2K on March 17, 1999. The
increase  in net sales is also  attributable  to  continued  growth  of  CDNOW's
customer base,  increased sales from repeat customers and increased  advertising
revenue.  For the three months ended March 31, 2000,  CDNOW added  approximately
440,000 new customers,  compared to 420,000 new customers that were added during
the three months ended March 31, 1999. The addition of approximately 440,000 new
customers  for the three  months ended March 31, 1999 brings the total number of
customers who have made purchases at either CDNOW or Music  Boulevard since each
site's  respective  inception to approximately 3.7 million as of March 31, 2000.
During  the first  quarter  of 2000,  CDNOW  continued  to devote a  substantial
portion of its marketing efforts to the retention of existing customers.  Repeat
customer purchases represented  approximately 66% of product sales for the three
months ended March 31, 2000,  compared to approximately 60% for the three months
ended March 31, 1999.  Advertising revenue was $3.0 million for the three months
ended  March 31,  2000,  representing  an  increase  of 236% from  approximately
$897,000 for the three months ended March 31, 1999.

     Beginning in the first  quarter of 2000,  CDNOW has elected to classify the
amount of coupons  redeemed to purchase  merchandise  as a reduction  to revenue
rather than the past  practice of  classifying  coupons as a sales and marketing
expense.  This  change  was  made  based  on  management's   determination  that
classifying coupons as a reduction to revenue was generally more consistent with
the  treatment  of  coupons by  internet  retailers.  Accordingly,  CDNOW made a
reclassification  between net revenues and sales and  marketing  expense for the
quarter  ended March 31,  1999.  Promotional  coupons  were  approximately  $2.8
million  and  $913,000  for the three  months  ended  March  31,  2000 and 1999,
respectively. This adjustment had no effect on net loss.

     CDNOW  also  includes  the  revenue   associated  with  barter  advertising
transactions in net sales. As a percentage of net sales, barter revenue was 1.5%
and 1.8% for the three months ended March 31, 2000 and 1999,  respectively.  The
total amount of barter revenue included in net sales was approximately  $630,000
and $390,000 for the three months ended March 31, 2000 and 1999, respectively.
<PAGE> 12
         International  sales  represented 16% of net sales for the three months
ended March 31, 2000  compared to 22% for the three months ended March 31, 1999.
The decrease in  international  sales as a percentage  of net sales is primarily
due to a  proportionally  larger increase in U.S. sales resulting from sales and
marketing  efforts  focused  on  the  U.S.  domestic  market,  such  as  CDNOW's
sponsorship  of the 2000 Grammy Awards and a custom CD promotion with Pizza Hut.
The decrease is also due to a proportionally  larger increase in U.S. sales from
Music Boulevard  customers obtained as a result of the acquisition of N2K, which
derived a smaller  percentage  of its sales from  international  customers  than
CDNOW, and to increased competition in international markets.

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  increased  101%,  to $36.1 million for the three months
ended March 31,  2000,  from $18.0  million for the three months ended March 31,
1999.  The increase in percentage  terms is in proportion to the 99% increase in
net sales. CDNOW's gross margin remained relatively  consistent at 17.2% for the
three months  ended March 31, 2000  compared to 18.0% for the three months ended
March 31, 1999.  During the first  quarter of 2000,  product  margins were lower
compared to the first quarter of 1999 due to a combination  of more  competitive
pricing and the mix of lower margin products,  which resulted from the launch of
CDNOW's expanded video and DVD store.  The effect of lower product margins,  was
offset by the increase in  advertising  revenue,  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 fees for  licensing of ratings,  reviews,  sound samples and
other  information.  Store maintenance costs are charged to expense as incurred.
Operating and development  expense increased by $6.9 million,  or 184%, to $10.6
million for the three months ended March 31, 2000,  compared to $3.7 million for
the three months ended March 31, 1999. As a percentage  of net sales,  operating
and  development  expense was 24.3% for the three  months  ended March 31, 2000,
compared to 17.0% for the three  months  ended March 31,  1999.  The increase in
both dollar and  percentage  terms is  attributable  to  increased  staffing and
associated  costs  related to  maintaining  the  features and  functionality  of
CDNOW's   online  site  and   transaction-processing.   The   increase  is  also
attributable  to the  write-off  in the  first  quarter  of 2000  of  previously
capitalized  software costs in the amount of $1.3 million  related to the Cosmic
Music Network,  a  content-oriented  site associated with the CDNOW store, which
focused on unsigned  bands and the  promotion  of their  music.  The decision to
discontinue  the  Cosmic  Music  Network  was  made as part of  CDNOW's  plan to
prioritize its spending  following the  termination of its proposed  merger with
Columbia House.

Sales and Marketing  Expense.  Sales and  marketing  expense  includes  expenses
related to marketing agreements, advertising and promotions, payroll and related
expenses for  personnel  engaged in  marketing,  selling,  and customer  service
activities,  including  internal  and external  commissions  and service fees on
advertising  revenue,  and credit  card  processing  fees.  Sales and  marketing
expense  increased by $6.4  million to $23.5  million for the three months ended
March 31, 2000  compared to $17.1  million for the three  months ended March 31,
1999.  As a percentage of net sales,  sales and marketing  expense was 54.0% for
the three  months  ended March 31, 2000  compared to 78.2% for the three  months
ended  March  31,  1999.   The  increase  in  absolute   dollars  was  primarily
attributable  to the  costs of the  custom  CD  promotion  with  Pizza  Hut.  In
addition, CDNOW incurred increased staffing and related costs in connection with
the  implementation  of its  marketing and sales  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  decrease  as a
percentage of sales is primarily  attributable  to the  increased  percentage of
CDNOW's  sales  from  repeat  customer  purchases,  which  are  relatively  less
expensive  than the cost of  acquiring  new  customers,  marketing  efficiencies
gained from the merger with N2K, and the termination  after the first quarter of
1999 of a number of high  fixed-cost  marketing  agreements  with other internet
sites.

General and Administrative Expense.  General and administrative expense consists
of payroll and related  expenses for  executive  and  administrative  personnel,
insurance,  professional fees and other general and corporate expenses.  General
and administrative  expense increased by $1.6 million,  or 115%, to $2.9 million
for the three  months  ended March 31,  2000,  compared to $1.4  million for the
three  months ended March 31, 1999.  As a percentage  of net sales,  general and
administrative  expense  increased  to 6.8% for the three months ended March 31,
2000 compared to 6.3% for the three months ended March 31, 1999. The increase in
both dollar and  percentage  terms is primarily  due to the hiring of additional
personnel to support the overall growth of CDNOW,  increased  professional fees,
and  approximately  $126,000  incurred in connection with the termination of the
proposed merger with Columbia House.

Amortization  of Goodwill and Other  Intangibles.  Amortization  of goodwill and
other  intangibles  related to the acquisition of N2K and superSonic  Boom, Inc.
were  approximately  $8.2  million  for the three  months  ended  March 31, 2000
compared to $1.3 million for the three  months  ended March 31, 1999.  The first
quarter of 1999 only  included 15 days of  amortization  of  goodwill  and other
intangibles  related  to the  acquisition  of  N2K,  since  the  merger  was not
completed until March 17, 1999.
<PAGE> 13

Liquidity and Capital Resources.

At March 31, 2000, CDNOW's cash and cash equivalents were $28.7 million compared
to $20.6  million at December  31,  1999.  In March 2000,  CDNOW sold  2,405,500
shares of  common  stock to Sony  Music  and Time  Warner  for $21  million.  In
February  1998,  CDNOW  consummated  its initial  public  offering by selling an
aggregate  of  4,561,250  shares of common  stock and  raising  net  proceeds of
approximately  $67.1 million.  In July 1998,  CDNOW  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,  CDNOW
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 flows, advances from related parties
and certain other short-term loans.

Net cash used in  operating  activities  of $31.7  million for the three  months
ended March 31, 2000, was primarily attributable to a net loss of $37.8 million,
of which $10.0 million was a non-cash charge for  depreciation  and amortization
and $1.3 million was a write-off of  capitalized  software  costs related to the
Cosmic  Music  Network.  Additional  uses of cash  included  a net $8.5  million
decrease  in  accounts   payable  and  accrued   expenses  due  to  payments  to
distributors  related to sales in the fourth quarter of 1999. These uses of cash
were partially  offset by a $2.0 million  decrease in prepaid expenses and other
assets primarily due to the expense of prepaid marketing agreements,  a $766,000
decrease in accounts  receivable and a $584,000 increase in deferred revenue and
deferred rent liability.  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  $981,000  in  accounts  receivable
partially  offset by a $3.0  million  increase in  accounts  payable and accrued
expenses and depreciation and amortization expenses of $2.2 million. The changes
in working capital for the three months ended March 31, 1999, exclude the impact
of the acquisition of the assets acquired and liabilities assumed as a result of
the acquisition of N2K on March 17, 1999.

Net cash used in investing  activities was approximately  $941,000 for the three
months ended March 31,  2000,  and related to the  purchases  of  equipment  and
leasehold  improvements.  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 net cash acquired from the  acquisition of N2K,  partially  offset by
purchases of equipment and leasehold improvements of approximately $544,000.

Net cash provided by financing activities was $40.7 million for the three months
ended  March 31,  2000.  During the first  quarter of 2000,  Sony Music and Time
Warner  purchased  $21  million of CDNOW  common  stock and CDNOW  borrowed  $20
million under the long-term  convertible debt agreement with Sony Music and Time
Warner.  In  addition,  proceeds  from  the  exercise  of  options  amounted  to
approximately  $140,000.  These  increases  in cash  were  partially  offset  by
approximately   $434,000  of  payments   under   capital  lease  and  term  loan
obligations. Net cash provided by financing activities was approximately $61,000
for the three months ended March 31, 1999,  and consisted  primarily of proceeds
of approximately  $307,000 from the exercise of options and warrants,  partially
offset by  approximately  $246,000 of payments under capital lease and term loan
obligations.

As of March 31, 2000,  CDNOW's  principal  commitments  consisted of obligations
under its marketing  agreements and  obligations  associated  with leased office
space and capital  financing  arrangements.  CDNOW is required to pay  aggregate
minimum  fixed fees under its  marketing  agreements  of $9.6  million  and $2.8
million  during the remaining  nine months of 2000 and the year ending  December
31, 2001.

CDNOW is actively  seeking a merger  transaction  or investor  and has  retained
Allen & Company  and  Deutsche  Bank  Alex.  Brown to assist  in  exploring  its
strategic options and alternative  financing  arrangements.  CDNOW believes that
its  current  cash and  cash  equivalents  are  sufficient  to meet its  payment
obligations until approximately September 30, 2000. However, CDNOW cannot assure
that it will be able to obtain the financing necessary to continue operating its
business.
<PAGE> 14
Factors Affecting CDNOW's Business and Prospects.

CDNOW expects to experience  significant  fluctuations  in its future  quarterly
operating  results  due to a variety of  factors,  many of which are outside its
control.  Factors that may affect CDNOW's  quarterly  operating results include:
(i) its ability to secure alternative financing  arrangements,  (ii) its ability
to retain  existing  customers,  attract new  customers  and  maintain  customer
satisfaction,  (iii) its competitors, (iv) price competition or higher wholesale
prices,  (v) the level of use of the  Internet and  consumer  acceptance  of the
Internet for the purchase of CDNOW's  products,  (vi) seasonal  fluctuations  in
sales of  CDNOW's  products,  (vii) its  ability to  maintain  its  systems  and
infrastructure and attract qualified personnel,  (viii) technical  difficulties,
system downtime or Internet performance problems not attributable to CDNOW, (ix)
the amount and timing of operating  costs relating to the maintenance of CDNOW's
business, operations and infrastructure,  (x) the timing of CDNOW promotions and
sales  programs,  (xi) the level of  merchandise  returns  experienced by CDNOW,
(xii) government  regulation and (xiii) general economic conditions and economic
conditions  specific  to the  Internet,  the  online  sale of  products  and the
entertainment industry.

Seasonality.

CDNOW 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   pre-recorded   music  and  other
entertainment-related  products.  Sales in the traditional retail music industry
are  significantly  higher in the fourth  calendar  quarter of each year,  which
corresponds  to the  holiday  season,  than  in the  preceding  three  quarters.
Additionally,  retail music sales are traditionally  hits-driven through popular
releases by well-known and emerging artists.  The presence or absence of hits in
any one quarter tends to affect music sales.

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.  CDNOW's computer systems and those of its key suppliers and
service   providers  may  fail,   which  could  result  in  system  failures  or
miscalculations  causing disruptions to operations,  including,  among others, a
temporary inability to process transactions,  create and send invoices or engage
in similar normal business activities,  which may adversely affect it. CDNOW has
developed  detailed plans for resolving problems related to the Year 2000 issue.
To date, CDNOW has not experienced any Year 2000 problems in computer systems or
operations. However, latent Year 2000 problems could be experienced.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Currency Risk.

CDNOW's revenues and expenses are denominated in United States dollars, with the
exception  of revenues  and  expenses  related to its  Japanese  Internet  site.
Therefore,  the only  current  exposure  to  foreign  currency  risk  relates to
international  sales.  For the  three  months  ended  March  31,  2000 and 1999,
international  sales  accounted  for  approximately  16% and  22% of net  sales,
respectively. To the extent that the value of the United States dollar increases
relative  to  foreign  currencies,  it  may be  more  costly  for  international
customers to make purchases. Therefore, changes in exchange rates may impact the
amount of CDNOW's international sales.

Interest Rate Risk.

CDNOW's exposure to market risk as a result of changes in interest rates relates
primarily to its  investment  portfolio.  CDNOW invests its funds 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, 2000, all of CDNOW's  investments 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  CDNOW's
investments  decreased by one percent,  its interest income for the three months
ended  March 31,  2000 would have  decreased  by  approximately  $245,000.  This
estimate assumes that the decrease occurred on the first day of 2000 and reduced
the yield of each  investment  instrument by one percent.  The impact on CDNOW's
future  interest  income from future  changes in  investment  yields will depend
largely on the gross amount of its investments.
<PAGE> 15
                                     PART II
                                OTHER INFORMATION
ITEM 1.  LEGAL PROCEEDINGS

N2K and its directors were  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  action
consolidated  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,  CDNOW's  Quarterly  Report on Form 10-Q for the  quarterly  periods ended
March 31, June 30, and  September  30, 1999,  and CDNOW's  Annual Report on Form
10-K for the twelve month period  ending  December 31, 1999,  respectively.  The
consolidated   action  was  a  purported   class  action  on  behalf  of  common
shareholders and sought to recover unspecified damages and other relief, as well
as costs and expenses, stemming from alleged violations of the Securities Act of
1933 in connection  with the public offering of the shares of N2K's common stock
in April 1998. The  consolidated  action alleged 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 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.  On May 21, 1999,
Judge Baer dismissed the plaintiff's complaint with prejudice. On June 22, 1999,
plaintiffs  filed a Notice of Appeal to the U.S. Court of Appeals for the Second
Circuit,  which is located in New York City.  On  February  7, 2000,  the Second
Circuit upheld Judge Baer's dismissal of the plaintiff's complaint.

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.  N2K  filed a
cross-complaint  for  affirmative  relief.  The  parties  are in the  process of
conducting discovery in preparation for trial.

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. The plaintiffs consented to entry of judgment against them in order to
speed their appeal of the court's  ruling.  The parties have appealed the matter
to the U.S. Court of Appeals for the Second Circuit.

N2K has 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  plaintiff   alleges
infringement of intellectual property rights, and seeks treble damages and costs
in an unspecified amount, as well as other declaratory and injunctive relief. In
this matter, discovery is ongoing. Additionally, Parsec has joined CDnow Online,
Inc. as a defendant.  CDnow  Online has  requested  that Liquid Audio  indemnify
CDnow  Online,   Inc.   against   these  claims  by  Parsec,   pursuant  to  the
indemnification  provisions  of the Order  Fullfillment  Agreement  entered into
between CDnow  Online,  Inc and Liquid  Audio,  Inc as of October 20, 1999,  and
Liquid  Audio has  agreed to assume  control  of the costs of the  defense  with
reservation   of  certain   rights.   CDnow   Online,   Inc.   expects  to  seek
indemnification  from other  parties that  presently or will provide  content or
services,  which may be allegedly  infringing the Parsec  patents.  N2K Inc. and
CDnow Online,  Inc. are wholly-owned  sister  subsidiaries of CDnow,  Inc. CDnow
Online, Inc. operates the cdnow.com Internet site.

CDNOW and N2K have been named  defendants  in an action  brought by BPW Rhythmic
Records, L.L.C. for breach of contract and other related claims arising out of a
label agreement  entered into between N2K Inc. and Rhythmic Records on March 27,
1998.  The plaintiff,  Rhythmic  Records,  seeks direct,  punitive and exemplary
damages,  costs,  including  attorney's  fees, and a constructive  trust against
CDNOW's assets.  Plaintiff  originally  filed the action in a Texas state court.
CDNOW and N2K removed  the action to the U.S.  District  Court for the  Northern
District of Texas, and filed a motion to have the case dismissed or moved to the
federal trial court in New York City.  Subsequently,  the federal court in Texas
transferred the action to the U.S.  District Court for the Southern  District of
New  York in New  York  City.  The  parties  are in the  process  of  conducting
discovery in preparation for trial.
<PAGE> 16
On  July  14,  1999,  CDNOW  filed  a  complaint  against  Lycos,  Inc.  and its
wholly-owned  subsidiary  Tripod,  Inc., in the U.S.  District  Court located in
Philadelphia, Pennsylvania. The complaint alleges that Lycos and Tripod breached
their  respective  obligations  to CDNOW as specified  in the linking  agreement
entered  into among  CDNOW,  Lycos and  Tripod on March 26,  1998.  CDNOW  seeks
damages in excess of $75,000 and a declaratory  judgment terminating the linking
agreement.  On  November  15,  1999,  Lycos  and  Tripod  filed  an  answer  and
counterclaim alleging breach of contract, quantum meruit and restitution, breach
of implied covenant of good faith and fair dealing and unfair and deceptive acts
and practices. Lycos and Tripod seek dismissal of the complaint, attorneys' fees
and  damages  as  established  at  trial.  The  parties  are in the  process  of
conducting discovery in preparation for trial.

CDNOW is a party to other  lawsuits  and  proceedings  arising  in the  ordinary
course of its business,  none of which, in CDNOW's opinion,  is likely to have a
material adverse effect on operations.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On July 12, 1999,  CDNOW  entered into the Merger  Agreement  with Sony and Time
Warner to combine its business with that of Columbia  House.  On March 13, 2000,
Sony, Time Warner and CDNOW mutually consented to terminate the Merger Agreement
and entered into a Termination Agreement.  Under the Termination Agreement, Sony
Music and Time Warner  purchased $21 million of CDNOW's common stock  (2,405,500
shares),  no par value, on March 16, 2000, and replaced a $30 million short-term
loan  commitment  with $30  million  of  long-term  convertible  debt,  which is
convertible  at the option of the  holder  into  CDNOW  common  stock at $10 per
share. The common stock and the convertible  debenture,  related to these events
are currently unregistered. As of March 31, 2000, CDNOW had borrowed $20 million
under the convertible  debenture.  CDNOW is currently using the proceeds to fund
working capital requirements.  As of March 31, 2000, neither Sony Music nor Time
Warner had  converted  any portion of the  borrowings  or accrued  interest into
CDNOW common stock.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

Form            Item #         Description                        Filing Date
----            ------         -----------                        -----------
Form 8-K        5, 7           Report on the  termination         March 13, 2000
                               of the proposed merger between
                               CDnow, Inc. and  Columbia House


<PAGE> 17


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 15, 2000                         /s/ Jason Olim
                                           -------------------------------------
                                                                      Jason Olim
                                                                     President &
                                                         Chief Executive Officer

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