<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 : September 30, 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)

                 (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 November 1, 1999: 30,355,233 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 September 30, 1999 and
December 31, 1998..............................................................3

Unaudited Consolidated Statements of Operations for the three and nine months
ended September 30, 1999 and 1998..............................................4

Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 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..........18



Part II - Other Information

          ITEM 1. Legal Proceedings...........................................19
          ITEM 2. Changes in Securities and Use of Proceeds...................20
          ITEM 3. Defaults Upon Senior Securities.............................20
          ITEM 4. Submission of Matters to a Vote of Security Holders.........20
          ITEM 5. Other Information...........................................20
          ITEM 6. Exhibits and Reports on Form 8-K............................20

Signatures      ..............................................................21


<PAGE> 3


                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


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

                                                                 September 30, 1999  December 31, 1998
                                                                 ------------------  -----------------
                                     ASSETS
                                     ------
<S>                                                              <C>                 <C>
CURRENT ASSETS:
  Cash and cash equivalents                                         $  27,992,615      $  49,041,370
  Accounts receivable (net of reserves of $787,804 and $299,991)        4,760,528            839,672
  Prepaid expenses and other                                            7,968,226          8,322,889
                                                                 ------------------  -----------------
    Total current assets                                               40,721,369         58,203,931
                                                                 ------------------  -----------------
  Property and equipment, net                                          15,775,005          6,643,995
  Goodwill and other intangibles, net                                  77,547,226            833,735
  Other assets                                                          1,573,572          3,361,982
                                                                 ------------------  -----------------
                                                                    $ 135,617,172      $  69,043,643
                                                                 ==================  =================

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

CURRENT LIABILITIES:
  Current portion of long term debt                                 $   1,138,855      $     822,043
  Accounts payable                                                     27,207,211         10,306,323
  Accrued merger costs                                                  3,984,698                 --
  Accrued expenses and other current liabilities                       18,807,478          4,667,395
                                                                 ------------------  -----------------
    Total current liabilities                                          51,138,242         15,795,761
                                                                 ------------------  -----------------

Long term debt                                                          1,619,957          1,750,892
Common stock subject to put rights                                      2,999,995                 --
Deferred rent liabilities                                                 960,887            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, 30,248,891 and 17,842,975 issued
  and outstanding                                                     203,962,558        102,137,536
Additional paid-in capital                                             15,085,069          4,325,817
Deferred compensation                                                     (84,939)          (216,913)
Accumulated deficit                                                  (140,064,597)       (55,107,503)
                                                                 ------------------  -----------------
    Total stockholders' equity                                         78,898,091         51,138,937
                                                                 ------------------  -----------------
                                                                    $ 135,617,172      $  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 September 30,  Nine Months Ended September 30,
                                                  --------------------------------  -------------------------------
                                                       1999              1998            1999            1998
                                                  ---------------   --------------  --------------  ---------------
<S>                                               <C>               <C>             <C>             <C>
Net sales                                         $   36,623,235    $  13,879,775   $  94,082,348   $   35,503,805
Cost of sales                                         28,594,837       10,980,974      74,579,155       28,549,562
                                                  ---------------   --------------  --------------  ---------------
Gross profit                                           8,028,398        2,898,801      19,503,193        6,954,243

Operating expenses:
  Operating and development                            6,748,065        2,390,004      16,301,454        5,155,718
  Sales and marketing                                 24,086,783       12,938,039      63,817,969       31,293,668
  General and administrative                           3,873,848          960,175       8,607,604        2,665,534
  Amortization of goodwill and other intangibles       8,133,696           87,000      17,615,377          115,800
                                                  ---------------   --------------  --------------   --------------
    Total operating expenses                          42,842,392       16,375,218     106,342,404       39,230,720
                                                  ---------------   --------------  --------------   --------------
  Operating loss                                     (34,813,994)     (13,476,417)    (86,839,211)     (32,276,477)

Interest and other income                                788,909          787,183       2,183,161        2,015,234
Interest expense                                        (104,936)         (68,160)       (297,798)        (563,074)
                                                  ---------------   --------------  --------------   --------------
Net loss                                             (34,130,021)     (12,757,394)    (84,953,848)     (30,824,317)

Accretion of preferred stock to redemption value              --               --              --         (115,542)
                                                  ---------------   --------------  --------------   --------------
Net loss applicable to common shareholders        $  (34,130,021)   $ (12,757,394)  $ (84,953,848)   $ (30,939,859)
                                                  ===============   ==============  ==============   ==============
Basic and diluted loss per common share:
  Net loss per common share                       $        (1.13)   $       (0.74)  $       (3.18)   $       (2.10)
                                                  ===============   ==============  ==============   ==============
Weighted average number of shares outstanding         30,196,369       17,141,221      26,725,732       14,764,870
                                                  ===============   ==============  ==============   ==============
</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>

                                                          Nine Months Ended September 30,
                                                        -----------------------------------
                                                              1999               1998
                                                        ----------------   ----------------
<S>                                                     <C>                <C>
Operating Activities:
  Net loss                                              $   (84,953,848)   $   (30,824,317)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
      Depreciation and amortization                          22,035,078          1,566,344
      Provision for returns and doubtful accounts                    --            121,732
      Common stock options issued to non-employees               55,894                 --
      Accelerated common stock option vesting                   903,000                 --

  Increase in operating assets and liabilities:
    Accounts receivable                                      (2,418,754)          (603,416)
    Prepaid expenses and other                                5,117,747         (4,966,500)
    Accounts payable                                         11,859,209            264,972
    Accrued expenses                                            439,472          2,241,765
    Deferred revenue                                            471,164            (88,171)
    Deferred rent liability                                     602,834            104,273
                                                        ----------------   ----------------
    Net cash used in operating activities                   (45,888,204)       (32,183,318)
                                                        ----------------   ----------------
Investing Activities:
  Sales and maturities of short-term investments                     --          1,003,045
  Purchases of property and equipment                        (2,708,790)        (2,320,232)
  Net cash acquired in (used in) acquisition                 27,783,893           (423,694)
                                                        ----------------   ----------------
    Net cash provided by (used in)investing activities       25,075,103         (1,740,881)
                                                        ----------------   ----------------
Financing Activities:
  Repayment of Series A Notes and warrants                           --         (5,777,500)
  Repayment of advances due to related parties                       --             (3,261)
  Payments on capitalized lease obligations & term loans     (1,061,487)          (338,887)
  Proceeds from warrants exercised                              102,352             59,890
  Proceeds from options exercised                               723,481            128,820
  Proceeds from issuance of common stock, net                        --         88,732,162
                                                        ----------------   ----------------
    Net cash provided by (used in) financing activities        (235,654)        82,801,224
                                                        ----------------   ----------------
Increase (decrease) in cash and cash equivalents            (21,048,755)        48,877,025
Cash and cash equivalents, beginning of period               49,041,370         10,686,001
                                                        ----------------   ----------------
Cash and cash equivalents, end of period                $    27,992,615    $    59,563,026
                                                        ================   ================
</TABLE>

        The accompanying notes are an integral part of these statements.


<PAGE>  6


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


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 its 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 period due to
seasonality and other factors.

NOTE 2 -- THE COMPANY

The Company is a leading online retailer of pre-recorded music, primarily
compact discs ("CDs"), and other entertainment-related products because of its
broad selection, site content and competitive pricing. The Company's revenues
are derived from the sale of pre-recorded music, other entertainment-related
products and advertising on the Company's cdnow.com site. 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 September 30, 1999 had accumulated losses of $140.1 million.
For the nine months ended September 30, 1999 and the year ended December 31,
1998, the Company's net losses were $85.0 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. At the closing of the Merger on
March 17, 1999, 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 owned approximately 60% of the combined company and the stockholders of
N2K owned approximately 40% of the combined company. Also on the Merger closing
date, CDnow/N2K was renamed CDnow, Inc.

On July 12, 1999, the Company executed a definitive agreement with Sony
Corporation of America and Time Warner Inc. to merge with Columbia House, the
leading club-based direct marketer of music and videos, which is owned equally
by Sony and Time Warner. The agreement provides for the formation of a new

<PAGE> 7

public company to be owned 37 percent each by Sony and Time Warner. CDnow's
existing stockholders will own the remaining 26 percent. Consummation of the
merger is subject to various conditions, including, but not limited to, approval
by the shareholders of the Company. The Company expects the merger to be
completed late in the fourth quarter of 1999 or the first quarter of 2000.

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.

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 and nine month periods ended September 30, 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 and nine months ended September 30, 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, a
wholly-owned subsidiary of CDnow, entered into an agreement pursuant to which
AOL agreed to purchase at its 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 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 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 or 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
November 1, 1999 was $13.25 per common share. As of November 1, 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 market value based upon the price of the Company's
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. As of November 1, 1999, there was no charge as the
market value of the Company's common stock is below $22.89 per common share.

<PAGE> 8

Revenue Recognition. Net sales, which consist primarily of pre-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. Revenues for sales
of advertising on the Company's cdnow.com site are recognized as the advertising
is run.

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 product sales in return for
licensing of ratings, reviews, sound samples and other information.

Sales and Marketing Expense. Sales and marketing expense consists primarily of
expenses related to advertising, promotion and marketing agreements as well as
payroll and related expenses for personnel engaged in marketing, selling and
customer service activities and credit card processing fees. Advertising costs
are included in sales and marketing expenses and are charged to expense as
incurred. Advertising costs were approximately $13.8 million and $41.8 million
for the three and nine months ended September 30, 1999 compared to approximately
$9.7 million and $23.7 million for the three and nine months ended September 30,
1998, respectively.

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 $6.8
million, $9.9 million, and $2.8 million during the remaining three months of
1999 and the years ending December 31, 2000 and 2001, respectively. The Company
also has minimum lease obligations associated with leased office space and
capital financing arrangements.

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, Excite, and MTV/VH1 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
current 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                                    69,128,867          3 years
                                        --------------
Total goodwill and other intangibles    $   94,328,867
                                        ==============
</TABLE>

<PAGE>  9

Amortization of goodwill and other intangibles related to the acquisition of N2K
and superSonic Boom, Inc., which was acquired in May 1998, were approximately
$8.1 million and $17.6 million for the three and nine months ended September 30,
1999, respectively. Amortization of goodwill and other intangibles was $87,000
and $115,800 for the three and nine months ended September 30, 1998,
respectively, and only related to the acquisition of superSonic Boom, Inc.
Accumulated amortization as of September 30, 1999 and December 31, 1998 was
approximately $17.8 million and $203,000, respectively. In addition, the balance
of accrued merger costs relating to the acquisition of N2K was approximately
$4.0 million as of September 30, 1999 and includes investment banking fees and
severance-related costs.

If the N2K 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 and nine months ended September 30, 1999 and 1998,
respectively:

<TABLE>
<CAPTION>

                        Three Months Ended September 30,    Nine Months Ended September 30,
                                  (Pro forma)                        (Pro forma)
                        --------------------------------    -------------------------------
                             1999              1998              1999             1998
                        --------------    --------------    --------------    -------------
<S>                     <C>               <C>               <C>               <C>
Net revenue             $   36,623,235    $   23,377,058    $  107,566,727    $  60,393,928
Net loss                $   34,130,021    $   44,938,916    $  104,091,560    $ 109,353,609
Loss per common share   $         1.13    $         1.53    $         3.46    $        4.06
</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 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 the Company'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 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 sale of entertainment-related products, including, but not
limited to, 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
owned approximately 60% of the combined company and the stockholders of N2K
owned approximately 40% of the combined company as of the date the Merger was
completed on March 17, 1999. Also on the Merger completion date, CDnow/N2K was
renamed CDnow, Inc.

Columbia House Merger. On July 12, 1999, the Company executed a definitive
agreement with Sony Corporation of America and Time Warner Inc. to combine the
businesses of the Company and Columbia House, the leading club-based direct
marketer of music and videos, which is owned equally by Sony and Time Warner.
The agreement provides for the formation of a new public company to be owned 37
percent each by Sony and Time Warner. CDnow's existing stockholders will own the
remaining 26 percent. Consummation of the merger is subject to various
conditions, including, but not limited to, approval by the shareholders of the
Company. The Company expects the merger to be completed late in the fourth
quarter of 1999 or the first quarter of 2000.

OVERVIEW

The Company is one of the leading electronic commerce retailers of pre-recorded
music, primarily 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

<PAGE> 11

the authoritative source for the online purchase of music including, without
limitation, CDs, and other entertainment-related products. The Company's online
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
the Company's retail focus, revenues are primarily derived from the sale of
pre-recorded music and related products. The Company also sells advertising and
sponsorships 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
online site.

The Company has grown rapidly since its founding in 1994. Since inception,
approximately 2.7 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 online site on May 17, 1999.
Approximately 1.1 million customers made their initial purchase during the nine
months ended September 30, 1999. The Company's net sales grew to $36.6 million
during the three months ended September 30, 1999, compared to $13.9 million
during the three months ended September 30, 1998. The Company's net sales
increased to $94.1 million during the nine months ended September 30, 1999,
compared to $35.5 million during the nine months ended September 30, 1998.

In addition to the sales generated from Music Boulevard customers as a result of
the acquisition of N2K and the rapid acquisition of new customers, the Company
has also generated significant sales from existing customers. Repeat customers
accounted for approximately 65% of net sales during the nine months ended
September 30, 1999, up from approximately 56% during the nine months ended
September 30, 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
offline marketing, including 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 Cosmic Music Network and C2 affiliate website programs and (iv)
using direct marketing techniques to target new and existing customers with
personalized communications. The Company periodically enters into marketing
agreements with various Internet portals and online content providers. The
Company presently has marketing agreements in place with, among others, AOL,
Excite and MTV/VH1.

Since its inception, the Company has incurred significant net losses and, as of
September 30, 1999, had accumulated losses of $140.1 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 online 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 pre-recorded music, including CDs,
and other entertainment-related products to achieve or maintain profitability on
a quarterly or annual basis.

RESULTS OF OPERATIONS

             Three Months Ended September 30, 1999, Compared to the
                     Three Months Ended September 30, 1998
             ------------------------------------------------------

Net Sales. Net sales reflect the sale of pre-recorded music and other
entertainment-related products, net of estimated returns, and include outbound
shipping and handling charges. Revenues from the sale of advertising on the
Company's online site are also included in net sales. For the three months

<PAGE> 12

ended September 30, 1999, net sales were $36.6 million, representing an increase
of 164% over the corresponding period in 1998. The increase in sales is
attributable to continued growth of the Company's customer base, increased sales
from repeat customers (including former Music Boulevard customers) and increased
advertising revenue. International sales represented 21% of net sales for the
three months ended September 30, 1999, compared to 22% for the corresponding
period in 1998. The decrease in international sales as a percentage of net sales
is primarily due to a proportionally larger increase in domestic sales from
Music Boulevard customers obtained as a result of the acquisition of N2K, which
had derived a smaller percentage of its sales from international customers than
CDnow.

For the three months ended September 30, 1999, the Company added approximately
314,000 new customers, bringing the total number of customers who have made
purchases at either CDnow or Music Boulevard since inception to approximately
2.7 million as of September 30, 1999. Repeat customer purchases represented
approximately 68% of net sales for the three months ended September 30, 1999
compared to 59% for the three months ended September 30, 1998. During the
quarter, the Company continued to devote a substantial portion of its marketing
efforts to the retention of existing customers.

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 was $28.6 million for the three months ended September
30, 1999, compared to $11.0 million for the corresponding period in 1998. The
Company's gross margin increased to 21.9% for the three months ended September
30, 1999, compared to 20.9% for the corresponding period in 1998. The increase
in gross margin percentage was primarily due to increased 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 royalties paid by the Company on product 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 $6.7 million for the three months ended September 30, 1999 compared
to $2.4 million for the corresponding period in 1998. As a percentage of net
sales, operating and development expense was 18.4% for the three months ended
September 30, 1999 compared to 17.2% for the three months ended September 30,
1998. The increase in both percentage and dollar terms is attributable to costs
of systems and telecommunications infrastructure necessary to support increased
traffic and transaction volume in the Company's online site to increased
staffing and associated costs related to enhancing the features and
functionality of the Company's product merchandising and transaction-processing
systems and to increased investments in store content.

Sales and Marketing Expense. Sales and marketing expense consists primarily of
expenses 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 expense was $24.1 million for
the three months ended September 30, 1999, compared to $12.9 million for the
three months ended September 30, 1998. The increase in absolute dollars was
primarily attributable to increased costs associated with the Company's
marketing agreements, including marketing agreements assumed by the Company as a
result of the acquisition of N2K, increased advertising and promotional
expenditures, increased staffing and related costs for marketing personnel to
implement the Company's marketing strategy and for customer service activities
necessary to support its increased customer base, and increased credit card
processing fees related to the growth of revenues. Sales and marketing expense
for the three months ended September 30, 1999, also includes $1.1 million in
severance costs related to the termination of employment of one of the Company's
officers, including non-cash charges from the accelerated vesting of stock
options associated with the employee's termination, and a $500,000 fee payable
as the result of the Company's decision to exercise an early termination
provision in its marketing agreement with Yahoo!, Inc. As a percentage of net
sales, sales and marketing expense decreased to 65.8% for the three months ended
September 30, 1999, compared to 93.2% for the three months ended September 30,


<PAGE> 13

1998. The decrease as a percentage of sales is primarily 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,
and efficiencies gained from the merger with N2K.

The Company expects the dollar amount of sales and marketing expense to continue
to increase in future periods. The Company is hopeful that its net sales will
increase in future periods and that its sales and marketing expense will
represent a decreasing percentage of net sales. However, 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 and administrative personnel,
insurance, professional fees and other general and corporate expenses. General
and administrative expense was $3.9 million for the three months ended September
30, 1999 compared to $1.0 million for the three months ended September 30, 1998.
As a percentage of net sales, general and administrative expense increased to
10.6% for the three months ended September 30, 1999 from 6.9% for the three
months ended September 30, 1998. The increase in general and administrative
expense, in both dollars and percentage terms, was due to the inclusion of
merger-related expenses of approximately $1.3 million incurred during the
quarter in connection with the Company's July 12, 1999 definitive agreement to
merge with Columbia House, the hiring of additional personnel to support the
overall growth of the Company and increased professional fees.

Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles related to the acquisition of N2K and superSonic Boom, Inc.
was $8.1 million for the three months ended September 30, 1999, compared to
$87,000 for the three months ended September 30, 1998, which only relates to the
acquisition of superSonic Boom, Inc.

Net Loss Applicable to Common Shareholders. The Company's net loss applicable to
common shareholders was $34.1 million for the three months ended September 30,
1999, compared to $12.8 million for the three months ended September 30, 1998.

             Nine Months Ended September 30, 1999, Compared to the
                      Nine Months Ended September 30, 1998
             -----------------------------------------------------

Net Sales. Net sales were $94.1 million for the nine months ended September 30,
1999, representing an increase of 165% over the corresponding period in 1998.
Net sales for the nine month period ended September 30, 1999, include the
Company's sales to Music Boulevard customers as a result of the acquisition of
N2K on March 17, 1999. The increase in sales is also attributable to continued
growth of the Company's customer base, increased sales from repeat customers and
increased advertising revenue. For the nine months ended September 30, 1999, the
Company added approximately 1.1 million new customers, bringing the total number
of customers who have made purchases at either CDnow or Music Boulevard since
inception to approximately 2.7 million as of September 30, 1999. Repeat customer
purchases represented approximately 65% of net sales for the nine months ended
September 30, 1999, compared to 59% for the nine months ended September 30,
1998. International sales represented 20% of net sales for the nine months ended
September 30, 1999 compared to 22% for the corresponding period in 1998. The
decrease in international sales as a percentage of net sales is primarily due to
a proportionally larger increase in domestic sales resulting from the inclusion
of sales to Music Boulevard customers obtained as a result of the acquisition of
N2K, which had derived a smaller percentage of its sales from international
customers than CDnow.

Cost of Sales. Cost of sales were $74.6 million for the nine months ended
September 30, 1999 compared to $28.5 million for the corresponding period in
1998. The Company's gross profit margin increased to 20.7% for the nine months
ended September 30, 1999, compared to 19.6% for the corresponding period in
1998. The increase in gross margin percentage was primarily due to an increase
in revenues from the sale of advertising, which has a higher margin than product
sales.

<PAGE> 14

Operating and Development Expense. Operating and development expense was $16.3
million for the nine months ended September 30, 1999, compared to $5.2 million
for the corresponding period in 1998. As a percentage of net sales, operating
and development expense was 17.3% for the nine months ended September 30, 1999,
compared to 14.5% for the nine months ended September 30, 1998. The increase in
dollar and percentage terms is attributable to costs of systems and
telecommunications infrastructure necessary to support increased traffic and
transaction volume in the Company's online site, to increased staffing and
associated costs related to enhancing the features and functionality of the
Company's product merchandising and transaction-processing systems and to
increased investments in store content.

Sales and Marketing Expense. Sales and marketing expense was $63.8 million for
the nine months ended September 30, 1999, compared to $31.3 million for the nine
months ended September 30, 1998. As a percentage of net sales, sales and
marketing expense decreased to 67.8% for the nine months ended September 30,
1999 compared to 88.1% for the nine months ended September 30, 1998. The
increase in absolute dollars was primarily attributable to increased costs
associated with the Company's marketing agreements, including those assumed by
the Company as a result of the acquisition of N2K and those entered into during
or after the second quarter of 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 increase is also due to increased advertising and
promotional expenditures. The decrease as a percentage of sales is primarily
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, and marketing efficiencies gained from the merger with
N2K.

The Company expects the dollar amount of sales and marketing expense to continue
to increase in future periods. The Company expects that its net sales will
increase in future periods and that its sales and marketing expense will
represent a decreasing percentage of net sales. However, 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 was $8.6
million for the nine months ended September 30, 1999 compared to $2.7 million
for the nine months ended September 30, 1998. As a percentage of net sales,
general and administrative expense increased to 9.1% for the nine months ended
September 30, 1999 from 7.5% for the nine months ended September 30, 1998. The
increase in general and administrative expense in both percentage and dollar
terms was primarily due to the inclusion of merger-related expenses of
approximately $2.0 million incurred in connection with the Company's July 12,
1999 definitive agreement to merge with Columbia House, the hiring of additional
personnel to support the overall growth of the Company and to increased
professional fees.

Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles related to the acquisition of N2K and superSonic Boom, Inc.
was $17.6 million for the nine months ended September 30, 1999 compared to
$116,000 for the nine months ended September 30, 1998 which only related to the
acquisition of superSonic Boom, Inc.

Net Loss Applicable to Common Shareholders. The Company's net loss applicable to
common shareholders was $85.0 million for the nine months ended September 30,
1999 compared to $30.9 million for the nine months ended September 30, 1998.

<PAGE> 15

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1999, the Company's cash and cash equivalents were $28.0
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 flows, advances from related parties
and certain other short-term loans.

Net cash used in operating activities of $45.9 million for the nine months ended
September 30, 1999 was primarily attributable to a net loss of $85.0 million, of
which $22.0 million was a non-cash charge for depreciation and amortization.
This use of cash was partially offset by a $5.1 million decrease in prepaid
expenses and other assets primarily due to the expense of prepaid marketing
agreements, and a $11.9 million increase in accounts payable and accrued
expenses due to an increase in accrued merchandise costs and accrued costs
associated with the Company's July 12, 1999 definitive agreement to merge with
Columbia House. The changes in working capital 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. For the nine months ended September 30,
1998, cash used in operating activities of $32.2 million resulted primarily from
a net loss of $30.8 million and an increase of $5.0 million in prepaid expenses,
partially offset by a $2.2 million increase in accrued expenses and depreciation
and amortization of $1.6 million.

Net cash provided by investing activities was $25.1 million for the nine months
ended September 30, 1999, which consisted of $27.8 million in net cash acquired
from the acquisition of N2K, partially offset by purchases of equipment of $2.7
million. Net cash used for investing activities was $1.7 million for the nine
months ended September 30, 1998 and consisted of purchases of equipment of $2.3
million and $424,000 of cash used in the purchase of superSonicBoom, Inc.,
partially offset by the sale of short term investments of $1.0 million.

Net cash used for financing activities was $236,000 for the nine months ended
September 30, 1999. During the nine months ended September 30, 1999 the Company
made $1.1 million of payments under capital lease and term loan obligations
including the payoff of the capital leases and loans assumed as a result of the
acquisition of N2K. This use of cash was partially offset by the receipt of
$825,000 of proceeds from exercised warrants and options. Net cash provided by
financing activities was $82.8 million for the nine months ended September 30,
1998, and consisted of net proceeds of approximately $88.7 million from the
Company's 1998 public offerings, 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 under the Company's
marketing agreements of $6.8 million, $9.9 million and $2.8 million during the
remaining three months of 1999 and the years ended December 31, 2000 and 2001,
respectively. The Company also has minimum lease obligations associated with
leased office space and capital financing arrangements.

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 September 30, 1999, the
Company had $28.0 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.

<PAGE> 16

In conjunction with the Company's execution of a definitive agreement on July
12, 1999 with Sony Corporation of America and Time Warner Inc. to combine the
businesses of the Company and Columbia House, the Company received a commitment
from Sony and Time Warner to provide the Company with up to $30 million in the
aggregate in working capital financing, if needed, based on certain working
capital minimums, drawable on or after December 16, 1999 to assist the Company
in meeting its working capital requirements until the closing of the merger,
which is expected to be completed in the fourth quarter of 1999 or the first
quarter of 2000. The Company believes that its current cash and cash equivalents
are sufficient to meet payment obligations until December 16, 1999.

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) the introduction of new
or enhanced Web pages, services, products and marketing agreements by the
Company and its competitors, (iii) price competition or higher wholesale prices,
(iv) the level of use of the Internet and consumer acceptance of the Internet
for the purchase of the Company's products, (v) seasonal fluctuations in sales
of the Company's products, (vi) its ability to upgrade and develop its systems
and infrastructure and attract qualified personnel, (vii) technical
difficulties, system downtime or Internet performance problems not attributable
to the Company, (viii) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure, (ix) the timing of Company promotions and sales programs, (x)
the level of merchandise returns experienced by the Company, (xi) government
regulation and (xii) general economic conditions and economic conditions
specific to the Internet, the online sale of products and the entertainment
industry. These and other factors are included in the "Risk Factors" section of
the Company's Registration Statement on Form S-4 (File No. 333-72463), which was
filed with the SEC on February 16, 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 and
other entertainment-related products. 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, especially with regard to products other than the
sale of music CDs. 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.

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. The Company'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 the Company. The Company has developed
detailed plans for resolving problems related to the year 2000 issue. Although
the Company expects that its internal systems will be modified to be year 2000
compliant in a timely manner, delays in achieving year 2000 compliance may
occur.

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 has held discussions with all of its key suppliers concerning their
year 2000 readiness. These suppliers and vendors have generally indicated that
their relevant systems are year 2000 compliant. However, the Company may be

<PAGE> 17

vulnerable to suppliers' and vendors' failures to remediate any year 2000
problems on a timely basis. The failure of a major supplier or vendor to convert
its systems on a timely basis or a conversion that is incompatible with the
Company's systems could have a material adverse impact on the Company. In
addition, most of the purchases from the Company's online store are made with
credit cards, and the Company's operations may be materially adversely affected
to the extent its customers are unable to use their credit cards due to
unresolved year 2000 problems.

The Company continues 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. The Company is working closely with
its major suppliers to test data transfer processes that support order
fulfillment. The Company examined data structures for accuracy and continues to
perform testing on its suppliers' fulfillment processes. While most of the
testing process is discussed through oral communications, year 2000 status plans
between the Company and several of its suppliers are documented in writing. Such
plans may include, but are not limited to, using alternative suppliers and
establishing contingent supply arrangements.

It is possible that a limited number of non-essential site features could
operate improperly. Non-essential features are features that do not interfere
with a customer's ability to purchase a product through the Company's online
site. It is possible that the Company could accept a customer's order but be
unable to electronically transmit the order to a supplier for fulfillment. In
these cases, the Company would transmit the orders using other means such as
facsimile.

The Company created two teams to manage the year 2000 project. The first team is
an eight person oversight committee chartered to prioritize projects and ensure
that the Company is on schedule to complete compliance projects. These employees
only dedicate several hours each week to the year 2000 project. The second team
includes ten additional staff members who have direct responsibility for
implementing specific year 2000 compliance tasks. The Company has engaged a
small number of external consultants to help monitor and remedy desktop systems
and supporting Microsoft NT servers for non-critical business operations.

The Company estimates that, as of September 30, 1999, the cost of remediating
its internal systems has been approximately $100,000, and it estimates that it
will spend an additional $150,000 during the remainder of 1999. The Company is
funding this effort through normal working capital.

<PAGE> 18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

Currently, the majority 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 nine months ended
September 30, 1999, and the year ended December 31, 1998, international sales
accounted for approximately 20% and 21% 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 the Company's
international sales.

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 September 30, 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 one percent, the Company's interest income for the nine
months ended September 30, 1999 would have decreased by approximately $400,000.
This estimate assumes that the decrease occurred on the first day of 1999 and
reduced the yield of each investment instrument by one percent. 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 the
"Liquidity and Capital Resources" section of this report).

<PAGE> 19

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

N2K (a wholly-owned subsidiary of the Company) and its directors are defendants
in a consolidated purported class action in the U.S. District Court located in
New York City 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, and CDnow's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1999 and June 30, 1999. 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 its 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
granted the defendants' motion and dismissed the plaintiff's complaint with
prejudice. On June 22, 1999, plaintiffs filed a Notice of Appeal in the U.S.
Court of Appeals for the Second Circuit. Each party to the action is in the
process of preparing and filing appropriate briefs and motions for the Appellate
Court. 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.

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

N2K and seventeen 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 located in New York City.
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 located in Pittsburgh, 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 consented
to entry of judgment against them and have filed an appeal with the U.S. Court
of Appeals for the Second Circuit. The parties have submitted appellate briefs
to the court and are awaiting a ruling. In the Parsec action, the Company has
answered the complaint and discovery is ongoing. The Company and its
wholly-owned subsidiary, N2K Inc., 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 contract entered into between N2K Inc. and Rhythmic
Records on March 27, 1998. The plaintiffs, Rhythmic Records, originally filed
the action in a Texas state court. CDnow and N2K have removed the action to the
federal trial court for the Northern District of Texas and have filed a motion
to have the case dismissed or moved to the federal trial court in New York City.
The Company, as a successor-in-interest to N2K, believes that the claims against
it in each of the actions listed in this paragraph if adversely determined
against the Company, will not have a material adverse effect on the Company's
business, financial condition or results of operations.

<PAGE> 20

On July 14, 1999, CDnow, Inc. filed a complaint against Lycos, Inc. and its
wholly-owned subsidiary Tripod, Inc. in the U.S. District located in
Philadelphia, Pennsylvania. The complaint alleges that Lycos and Tripod breached
their respective obligations to CDnow as specified in the contract entered into
among CDnow, Lycos and Tripod on March 26, 1998. The parties are in the early
stages of this litigation and have not yet begun formal pre-trial discovery.

Other than the matters listed above, from time to time, the Company is involved
in litigation incidental to its business. The Company believes that none of this
other 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

None

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

A.    EXHIBITS

      27.1  Financial Data Schedule.

B.    Reports on Form 8-K

        Form    Item #              Description                Filing Date
      --------  ------  ------------------------------------  -------------


      Form 8-K   5,7    Report of the execution of an         July 15, 1999
                        Agreement of Merger and
                        Contribution by and among CDnow,
                        Inc., Time Warner Inc. and Sony
                        Corporation of America to combine
                        the businesses of CDnow and Columbia
                        House


<PAGE>  21


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


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