<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: June 30, 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 August 9, 2000:  32,961,610  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 June 30, 2000 and
          December 31, 1999....................................................3

          Unaudited Consolidated Statements of Operations for the three and
          six months ended June 30, 2000 and 1999..............................4

          Unaudited Consolidated Statements of Cash Flows for the six months
          ended June 30, 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...........................................11

Item 3.   Quantitative and Qualitative Disclosures About Market Risk..........17

Part II - Other Information

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

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


<PAGE> 3


                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                          CDNOW, INC. AND SUBSIDIARIES
                      UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                 June 30, 2000     December 31, 1999
                                                                ---------------    -----------------
                                     ASSETS
                                     ------
<S>                                                             <C>                <C>
Current Assets:
    Cash and cash equivalents                                   $  10,517,177      $   20,612,706
    Accounts receivable, net                                        3,385,637           4,809,931
    Prepaid expenses and other                                      3,030,104           5,580,241
                                                                ---------------    -----------------
                 Total current assets                              16,932,918          31,002,878
                                                                ---------------    -----------------
Property and equipment, net                                        13,500,450          17,216,980
Goodwill and other intangibles, net                                53,666,937          70,121,321
Other assets                                                          799,614           1,201,809
                                                                ---------------    -----------------
        TOTAL ASSETS                                            $  84,899,919      $  119,542,988
                                                                ===============    =================


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

Current Liabilities:
    Current portion of long term debt                           $   1,596,196      $    1,670,838
    Accounts payable                                               24,153,567          46,431,122
    Accrued N2K Inc. merger costs                                   2,181,263           4,300,117
    Accrued expenses and other current liabilities                 19,282,797          15,753,572
                                                                ---------------    -----------------
                 Total current liabilities                         47,213,823          68,155,649
                                                                ---------------    -----------------

Long term debt                                                      1,775,593           2,629,359
Deferred rent and other long term liabilities                       1,792,152             992,696
Long term convertible debt                                         25,000,000                  --
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 shares
      authorized, no shares issued and outstanding                         --                  --
    Common stock, no par value, 200,000,000
      shares authorized, 32,813,965 and 30,355,948 issued
      and outstanding                                             225,784,992         204,573,908
    Additional paid-in capital                                     15,118,853          14,589,814
    Deferred compensation                                              (9,007)            (61,905)
    Accumulated deficit                                          (234,776,482)       (174,336,528)
                                                                ---------------    -----------------
                 Total stockholders' equity                         6,118,356          44,765,289
                                                                ---------------    -----------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              $  84,899,919      $  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 June 30,       Six Months Ended June 30,
                                                 -------------------------------   ------------------------------
                                                      2000             1999             2000            1999
                                                 ---------------  --------------   --------------  --------------
<S>                                              <C>              <C>              <C>             <C>
 Net sales                                       $   34,017,692   $  33,167,956    $  77,600,841   $  55,098,317
 Cost of sales                                       26,498,247      28,000,743       62,602,263      45,984,318
                                                 ---------------  --------------   --------------  --------------
     Gross profit                                     7,519,445       5,167,213       14,998,578       9,113,999

 Operating expenses:
   Operating and development                          7,558,458       5,827,207       18,147,838       9,553,389
   Sales and marketing                               11,284,549      20,231,717       34,806,427      37,370,391
   General and administrative                         2,813,017       3,362,400        5,762,525       4,733,756
   Amortization of goodwill and other intangibles     8,188,194       8,144,055       16,385,217       9,481,681
                                                 ---------------  --------------   --------------  --------------
       Total operating expenses                      29,844,218      37,565,379       75,102,007      61,139,217
                                                 ---------------  --------------   --------------  --------------
   Operating loss                                   (22,324,773)    (32,398,166)     (60,103,429)    (52,025,218)

 Interest and other income                              335,366         766,131          657,464       1,394,253
 Interest expense                                      (637,051)        (88,242)        (993,989)       (192,862)
                                                 ---------------  --------------   --------------  --------------
 Net loss                                        $  (22,626,458)  $ (31,720,277)   $ (60,439,954)  $ (50,823,827)
                                                 ===============  ==============   ==============  ==============

 Basic and diluted net loss per common share     $        (0.69)  $       (1.06)   $       (1.90)  $       (2.04)
                                                 ===============  ==============   ==============  ==============
 Weighted average number of shares outstanding   $   32,723,051   $  30,038,908    $  31,732,731   $  24,960,940
                                                 ===============  ==============   ==============  ==============

</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>

                                                                    Six Months Ended June 30,
                                                                        2000          1999
                                                                ---------------- ----------------
<S>                                                             <C>              <C>
Operating Activities:
  Net loss                                                      $   (60,439,954) $   (50,823,827)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
      Depreciation and amortization                                  20,020,479       12,124,299
      Net loss on fixed asset disposals                               1,310,488               --
      Common stock options issued for services rendered                  29,039           31,979
  Increase (decrease) in operating assets and liabilities:
    Accounts receivable                                               1,424,294       (1,785,111)
    Prepaid expenses and other                                        3,052,307        5,193,536
    Accounts payable                                                (21,777,555)       4,496,676
    Accrued expenses                                                    976,637         (735,214)
    Deferred revenue                                                    380,028          225,385
    Deferred rent liability                                             799,456          515,901
                                                                ---------------- ----------------
      Net cash used in operating activities                         (54,224,781)     (30,756,376)
                                                                ---------------- ----------------
Investing Activities:
  Purchases of property and equipment                                (1,153,422)      (1,633,771)
  Cash acquired in acquisition                                               --       25,266,787
                                                                ---------------- ----------------
      Net cash provided by (used in) investing activities            (1,153,422)      23,633,016
                                                                ---------------- ----------------

Financing Activities:
  Payments on term loans payable                                        (68,720)         (29,310)
  Proceeds from the sale of stock                                    21,000,000               --
  Proceeds from convertible debt                                     25,000,000               --
  Payments on capitalized lease obligations                            (859,690)        (481,712)
  Proceeds from warrants exercised                                           --          102,352
  Proceeds from options exercised                                       211,084          418,950
                                                                ---------------- ----------------
      Net cash provided by financing activities                      45,282,674           10,280
                                                                ---------------- ----------------
Decrease in cash and cash equivalents                               (10,095,529)      (7,113,080)
Cash and cash equivalents, beginning of period                       20,612,706       49,041,370
                                                                ---------------- ----------------
Cash and cash equivalents, end of period                        $    10,517,177  $    41,928,290
                                                                ================ ================
</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),   cassettes   and   digital   downloads,    and   other
entertainment-related  products,  including  movies on VHS tape and DVD. 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 June 30, 2000 had accumulated losses of $234.8 million. For the six months
ended June 30, 2000 and 1999,  CDNOW's  net losses were $60.4  million and $50.8
million, respectively. In addition, CDNOW had a working capital deficit of $30.3
million  as of  June  30,  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 substantially increase net sales and improve 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.

During the second quarter of 2000, CDNOW financed 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.  As of July 13,  2000,  CDNOW had
borrowed $30 million,  the total amount  available,  under the convertible  debt
facility.  On August 3, 2000, as a result of the Convertible Loan Agreement with
Bertelsmann  Inc.(see below),  CDNOW repaid all of the principal and outstanding
accrued interest totalling approximately $31 million.

On July 19, 2000, CDNOW, Bertelsmann Inc. ("Bertelsmann"),  and BINC Acquisition
Corp  ("BINC"),  a  wholly-owned  subsidiary  of  Bertelsmann,  entered  into an
Agreement and Plan of Merger under which  Bertelsmann,  through BINC, offered to
acquire  all of the  outstanding  capital  stock of CDNOW for $3.00 per share in
cash.  A tender  offer  commenced on July 26, 2000 and is scheduled to expire on
August 22, 2000 at midnight  (EDT).  After  expiration  of the tender  offer and
subject to certain  conditions of the offer,  all CDNOW  shareholders  that have
tendered and not properly withdrawn their shares will be paid $3.00 per share in
cash, BINC will merge with CDNOW, CDNOW will become a wholly-owned subsidiary of
Bertelsmann  and all  remaining  CDNOW  shareholders  (who did not tender  their
shares into the tender  offer and have not  exercised  dissenter's  rights) will
also receive $3.00 in cash for each of their shares.  The transaction is subject
to customary closing  conditions,  including the tender of a majority of CDNOW's
outstanding common stock on a diluted basis and obtaining  necessary  regulatory

<PAGE> 7

approvals.  The calculation of CDNOW's outstanding stock on a diluted basis will
include  options and  warrants to acquire  CDNOW  common  stock with an exercise
price of $10 per share or less. The board of directors of CDNOW has  unanimously
approved the merger  agreement and has  recommended to CDNOW  shareholders  that
they tender their shares into the proposed offer from Bertelsmann.

In addition to the Agreement and Plan of Merger,  CDNOW and Bertelsmann  entered
into a Convertible Loan Agreement.  The Convertible Loan Agreement  provides for
loans  from  Bertelsmann  to  CDNOW  in  an  aggregate  principal  amount  up to
approximately  $43  million.  On August 3, 2000,  CDNOW used  approximately  $31
million  available under the  Convertible  Loan Agreement to repay the debt plus
accrued interest owed to Sony Music and Time Warner.  The $12 million  remaining
under the  Convertible  Loan Agreement will be used to meet the working  capital
needs of CDNOW  during the period  from July 31,  2000  through  the  earlier of
October 31, 2000 or the termination of the Convertible Loan Agreement.

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  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 current treatment of coupons by internet retailers.  Accordingly, CDNOW made
a reclassification  between net revenues and sales and marketing expense for the
three and six months ended June 30, 1999. Promotional coupons were approximately
$659,000  and $1.4  million for the three  months  ended June 30, 2000 and 1999,
respectively.  Promotional  coupons  were  approximately  $3.5  million and $2.4
million  for the six months  ended June 30,  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 and six months  ended June 30,  2000,  pursuant  to  Statement  of
Financial Accounting Standards No. 128 "Earnings Per Share."

     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 June 30,
2000, no such write-down was required.

<PAGE> 8

     Prepaid  expenses  include  approximately  $1.5 million and $3.9 million at
June 30,  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 $387,000 and $804,000 at June 30, 2000, and December
31, 1999, respectively.

Internally  Developed Systems and Software.  CDNOW follows 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 are being  amortized over the estimated
useful  life of  three  years.  At June 30,  2000 and  December  31,  1999,  net
capitalized  computer  software  developed  or  obtained  for  internal  use was
approximately $480,000 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  Cosmic  Music  Network,   a
content-oriented  site  associated  with the  cdnow.com  site,  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 June 30, 2000 was $3.0938 per common share.
As of June 30, 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 $407,000 and $355,000 for the three months ended June 30, 2000 and
1999,  respectively.  For the six months ended June 30, 2000 and 1999, the total
amount of barter revenue included in net sales was  approximately $1 million and
$745,000, respectively.

<PAGE> 9

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.

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  $4.4 million and $14.6 million
for the three  months  ended June 30, 2000 and 1999,  respectively.  For the six
months ended June 30, 2000 and 1999,  advertising costs were approximately $14.2
million and $28.0 million,  respectively.  CDNOW pays commissions in the form of
merchandise  credit or cash to the members of its Cosmic Credit and C2 affiliate
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 Statement of Financial  Accounting Standards 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 Statement of
Financial  Accounting  Standards  No.  131,  "Disclosure  About  Segments  of an
Enterprise  and Related  Information."  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  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
provided 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 Agreement of Merger
and Contribution 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 bore 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
were due no later than January 15, 2003. At any time, Sony Music and Time Warner

<PAGE> 10

had the option to 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 had a first  security
interest in all of the assets of CDNOW. CDNOW had made borrowings of $25 million
and $0 as of June 30, 2000, and December 31, 1999, respectively.  As of June 30,
2000,  neither  Sony Music nor Time  Warner  had  converted  any  portion of the
borrowings or accrued interest into CDNOW common stock. The remaining $5 million
was borrowed on July 13, 2000. On August 3, 2000, as a result of the Convertible
Loan Agreement with Bertelsmann  (see below),  CDNOW repaid all of the principal
and outstanding  accrued interest  totalling  approximately  $31 million and the
rights  of Sony  Music and Time  Warner to  convert  outstanding  principal  and
interest into CDNOW common stock were cancelled.

On July 19,  2000,  CDNOW and  Bertelsmann  entered  into the  Convertible  Loan
Agreement  referenced in Note 2. The  Convertible  Loan  Agreement  provides for
loans of  approximately  $31 million from  Bertelsmann to CDNOW to repay in full
all principal and accrued interest owed to Sony Music and Time Warner, which was
repaid on  August  3,  2000.  In  addition,  pursuant  to the  Convertible  Loan
Agreement, Bertelsmann agreed to make additional loans ("Working Capital Loans")
to CDNOW in an  aggregate  amount up to $12 million  during the period from July
31, 2000  through the  earlier of October  31,  2000 or the  termination  of the
Convertible  Loan Agreement.  Working Capital Loans proceeds may only be used in
the ordinary course of business to meet ongoing  working capital needs.  Working
Capital Loans are only  available if CDNOW's  available cash balance falls below
$3 million and the  aggregate  principal  amount of Working  Capital  Loans that
CDNOW  may  borrow  in any  four-week  period  is  capped  based  on  cash  flow
projections that CDNOW has provided to Bertelsmann.  Bertelsmann's commitment to
make Working  Capital  Loans to CDNOW  terminates  on the earlier of October 31,
2000, the date of the  termination  of the Agreement and Plan of Merger,  or the
date any other  person  acquires  control  of  CDNOW.  On such  date,  the total
principal and interest  borrowed from  Bertelsmann  under the  Convertible  Loan
Agreement is  immediately  due and  payable,  unless the  Agreement  and Plan of
Merger is terminated by CDNOW as a result of a breach by Bertelsmann,  then such
amounts do not become payable until 60 days after such termination.  The amounts
borrowed bear interest at the six-month London interbank  offered rate in effect
two days prior to the borrowing plus 3%. 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.  Bertelsmann  may convert any portion of the
borrowings and accrued interest into CDNOW common stock at a conversion price of
$1.50 per share,  provided  that in no event  shall  Bertelsmann  be entitled to
receive more than 49% of the  outstanding  CDNOW common stock on a fully-diluted
basis. As collateral,  Bertelsmann  has a first security  interest in all of the
assets of CDNOW.

NOTE 5 - STOCKHOLDERS' EQUITY

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,
which is computed as 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 cannot be larger than
accumulated  compensation expense incurred. To date, no compensation expense has
been  recognized as CDNOW's stock price has been below the new exercise price of
$5.625.

<PAGE> 11

NOTE 6 -- COMMITMENTS AND CONTINGENCIES

As of June 30, 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  $7.5 million and $2.8 million during the remaining
six 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 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 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 June 30, 2000, no such write down was required.

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.

<PAGE> 12

Recent Developments.

On July 19, 2000, CDNOW, Bertelsmann Inc. ("Bertelsmann"),  and BINC Acquisition
Corp  ("BINC"),  a  wholly-owned  subsidiary  of  Bertelsmann,  entered  into an
Agreement and Plan of Merger under which  Bertelsmann,  through BINC, offered to
acquire  all of the  outstanding  capital  stock of CDNOW for $3.00 per share in
cash.  A tender  offer  commenced on July 26, 2000 and is scheduled to expire on
August 22, 2000 at midnight  (EDT).  After  expiration  of the tender  offer and
subject to certain  conditions of the offer,  all CDNOW  shareholders  that have
tendered and not properly withdrawn their shares will be paid $3.00 per share in
cash, BINC will merge with CDNOW, CDNOW will become a wholly-owned subsidiary of
Bertelsmann  and all  remaining  CDNOW  shareholders  (who did not tender  their
shares into the tender  offer and have not  exercised  dissenter's  rights) will
receive $3.00 in cash for each of their shares.  The  transaction  is subject to
customary  closing  conditions,  including  the tender of a majority  of CDNOW's
outstanding common stock on a diluted basis and obtaining  necessary  regulatory
approvals.  The calculation of CDNOW's outstanding stock on a diluted basis will
include  options and  warrants to acquire  CDNOW  common  stock with an exercise
price of $10 per share or less. The board of directors of CDNOW has  unanimously
approved the merger  agreement and has  recommended to CDNOW  shareholders  that
they tender their shares into the proposed offer from Bertelsmann.

In addition to the Agreement and Plan of Merger,  CDNOW and Bertelsmann  entered
into a Convertible Loan Agreement.  The Convertible Loan Agreement  provides for
loans  from  Bertelsmann  to  CDNOW  in  an  aggregate  principal  amount  up to
approximately  $43  million.  On August 3, 2000,  CDNOW used  approximately  $31
million  available under the  Convertible  Loan Agreement to repay the principal
and accrued interest  borrowed from Sony Music and Time Warner.  The $12 million
remaining under the Convertible  Loan Agreement will be used to meet the working
capital  needs of CDNOW during the period from July 31, 2000 through the earlier
of October 31, 2000 or the termination of the Convertible Loan Agreement.

Overview.

CDNOW is a leading electronic commerce retailer of pre-recorded music, including
CDs, cassettes and digital downloads, and other entertainment-related  products,
including  movies on VHS tape and DVD.  Its early  entry into the  online  music
retailing  industry  has helped CDNOW gain a  well-recognized  brand and a large
customer  base.  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 movies.  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 4 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  270,000  customers made their initial  purchase  during the three
months ended June 30, 2000.  CDNOW's net sales grew to $34.0 million  during the
three  months ended June 30, 2000,  compared to $33.2  million  during the three
months  ended June 30, 1999.  For the six months ended June 30, 2000,  net sales
grew to $77.6  million,  compared to $55.1  million  during the six months ended
June 30, 1999.

In addition to the rapid acquisition of new customers,  CDNOW has also generated
significant  sales from  existing  customers.  Repeat  customers  accounted  for
approximately  72% of net sales during the three months ended June 30, 2000,  up
from  approximately  66% during the three  months  ended June 30,  1999.  Repeat
customers  accounted  for  approximately  69% of net sales during the six months
ended June 30, 2000, up from  approximately 63% during the six months ended June
30, 1999. Since inception,  CDNOW has incurred significant net losses and, as of
June 30, 2000, had accumulated losses of $234.8 million.

<PAGE> 13

CDNOW  believes  that  the  key  factor  affecting  its  financial   success  is
consummation of the transaction with Bertelsmann.

Results of Operations.

Three  Months  Ended June 30, 2000  Compared to the Three  Months Ended June 30,
1999.

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  $34.0  million  for the  three  months  ended  June 30,  2000,
representing an increase of 2.6% over the three months ended June 30, 1999. This
increase is considerably less than prior  quarter-to-quarter  revenue growth due
to the  substantial  decrease in  advertising  spending in the second quarter of
2000. However, the 2.6% increase in net sales is attributable to increased sales
from  repeat  customers.  During the second  quarter  of 2000,  CDNOW  devoted a
substantial  portion of its  marketing  efforts  to the  retention  of  existing
customers.  Repeat customer purchases  represented  approximately 72% of product
sales for the three months ended June 30, 2000,  compared to  approximately  66%
for the  three  months  ended  June 30,  1999.  CDNOW's  customer  base on which
marketing efforts were focused was considerably larger during the second quarter
of 2000  compared to the same period in 1999.  The total number of customers who
have made  purchases at CDNOW or Music  Boulevard  since each site's  respective
inception, was approximately 4 million as of June 30, 2000 and 2.4 million as of
June 30, 1999.

     Beginning  in the first  quarter of 2000,  CDNOW  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 current treatment of coupons by internet retailers.  Accordingly, CDNOW made
a reclassification  between net revenues and sales and marketing expense for the
quarter ended June 30, 1999. Promotional coupons were approximately $659,000 and
$1.4 million for the three  months  ended June 30, 2000 and 1999,  respectively.
This adjustment had no effect on net loss.

     CDNOW also includes the revenue associated with cash and barter advertising
transactions in net sales. Cash and barter advertising  revenue was $1.5 million
for the three months ended June 30, 2000 compared to approximately  $1.9 million
for the three months ended June 30, 1999. The decrease in advertising revenue is
primarily   attributable  to  potential   advertisers'  concerns  regarding  the
financial  future of CDNOW.  The total amount of barter revenue  included in net
sales was  approximately  $407,000  and $355,000 for the three months ended June
30, 2000 and 1999,  respectively.  As a percentage of net sales,  barter revenue
was  1.2%  and  1.1%  for the  three  months  ended  June  30,  2000  and  1999,
respectively.

     International sales represented 18% of net sales for the three months ended
June 30, 2000  compared to 20% for the three  months  ended June 30,  1999.  The
decrease in international sales as a percentage of net sales is primarily due 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 decreased $1.5 million, to $26.5 million for the
three months ended June 30, 2000,  from $28.0 million for the three months ended
June 30,  1999.  CDNOW's  gross  margin  increased to 22.1% for the three months
ended June 30, 2000  compared to 15.6% for the three months ended June 30, 1999.
The increase in gross margin is primarily  attributable to improved shipping and
handling  efficiencies and a less aggressive use of sales discounts and coupons,
partially offset by a decline in advertising revenue,  which has a higher margin
than product sales.

<PAGE> 14

     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 $1.8 million,  or 29.7%, to $7.6
million for the three months  ended June 30, 2000,  compared to $5.8 million for
the three months ended June 30, 1999.  As a percentage  of net sales,  operating
and  development  expense was 22.2% for the three  months  ended June 30,  2000,
compared to 17.6% for the three months ended June 30, 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.

     Sales and Marketing Expense.  Sales and marketing expense includes expenses
related to marketing agreements,  advertising,  barter advertising,  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  decreased  by $8.9  million to $11.3  million  for the three
months ended June 30, 2000  compared to $20.2 million for the three months ended
June 30, 1999.  As a percentage of net sales,  sales and  marketing  expense was
33.2% for the three months  ended June 30, 2000  compared to 61.0% for the three
months ended June 30, 1999. The decrease in both absolute dollars and percentage
terms  was  primarily   attributable  to  a  reduction  in  offline  and  online
advertising expense,  including the termination after the second quarter of 1999
of a number of high fixed-cost  marketing  agreements with other internet sites.
Advertising  costs were  approximately  $4.4  million and $14.6  million for the
three  months ended June 30, 2000 and 1999,  respectively.  The decrease is also
attributable to the increased percentage of CDNOW's sales from repeat customers,
which are relatively less expensive than the cost of acquiring new customers.

     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  decreased  by  approximately
$550,000,  or 16.3%,  to $2.8  million for the three months ended June 30, 2000,
compared  to $3.4  million  for the  three  months  ended  June 30,  1999.  As a
percentage of net sales,  general and  administrative  expense decreased to 8.3%
for the three months ended June 30, 2000  compared to 10.1% for the three months
ended  June 30,  1999.  The  decrease  in both  dollar and  percentage  terms is
primarily  due  to  a  decrease  in   professional   fees  and  a  reduction  in
merger-related  costs incurred in connection with the terminated proposed merger
with Columbia House and the search for a new merger partner.

     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 June 30, 2000
compared to $8.1 million for the three months ended June 30, 1999.

Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999.

     Net Sales.  Net sales were $77.6  million for the six months ended June 30,
2000, representing an increase of 40.8% over the six months ended June 30, 1999.
Net sales for the six months  ended  June 30,  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 attributable to increased sales from repeat  customers,
continued  growth of CDNOW's customer base, and increased  advertising  revenue.
During the first two quarters of 2000,  CDNOW  continued to devote a substantial
portion of its marketing efforts to the retention of existing customers.  Repeat
customer  purchases  represented  approximately 69% of product sales for the six
months ended June 30,  2000,  compared to  approximately  63% for the six months
ended June 30, 1999.  The total number of customers  who have made  purchases at
CDNOW or Music  Boulevard  since each site's  respective  inception,  which were

<PAGE> 15

available to CDNOW to focus its marketing  efforts,  was approximately 4 million
as of June 30, 2000 and 2.4 million as of June 30, 1999. Advertising revenue was
$4.6 million for the six months ended June 30, 2000, representing an increase of
62% from approximately $2.8 million for the six months ended June 30, 1999.

     Beginning  in the first  quarter of 2000,  CDNOW  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 current treatment of coupons by internet retailers.  Accordingly, CDNOW made
a reclassification  between net revenues and sales and marketing expense for the
six months ended June 30, 1999.  Promotional  coupons  were  approximately  $3.5
million  and $2.4  million  for the six  months  ended  June 30,  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 1.3%
for the six months  ended  June 30,  2000 and 1999.  The total  amount of barter
revenue included in net sales was  approximately $1 million and $745,000 for the
six months ended June 30, 2000 and 1999, respectively.

     International  sales  represented 17% of net sales for the six months ended
June 30,  2000  compared  to 20% for the six  months  ended June 30,  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 increased 36.1%, to $62.6 million for the six
months ended June 30, 2000, from $46.0 million for the six months ended June 30,
1999. The increase in percentage terms is due primarily to the 40.8% increase in
net sales,  partially  offset by the  increase in gross  margin.  CDNOW's  gross
margin  increased  to 19.3% for the six months  ended June 30, 2000  compared to
16.5% for the six months ended June 30,  1999.  The increase in gross margin can
be  attributed  to  improved  shipping  and  handling  efficiencies  and a  less
aggressive  use of sales  discounts  and coupons and an increase in  advertising
revenue, which has a higher margin than product sales.

     Operating  and  Development  Expense.  Operating  and  development  expense
increased  by $8.5  million,  or 90%, to $18.1  million for the six months ended
June 30, 2000,  compared to $9.6 million for the six months ended June 30, 1999.
As a percentage of net sales,  operating and  development  expense was 23.4% for
the six months ended June 30,  2000,  compared to 17.3% for the six months ended
June 30, 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 decreased by $2.6
million to $34.8  million  for the six months  ended June 30,  2000  compared to
$37.4  million for the six months  ended June 30, 1999.  As a percentage  of net
sales,  sales and marketing  expense was 44.9% for the six months ended June 30,
2000,  compared to 67.8% for the six months ended June 30, 1999. The decrease in

<PAGE> 16

both dollar and percentage  terms was primarily  attributable  to a reduction in
offline and online  advertising  expense,  including the  termination  after the
second quarter of 1999 of a number of high fixed-cost  marketing agreements with
other  internet  sites.  For the six  months  ended  June  30,  2000  and  1999,
advertising   costs  were   approximately   $14.2  million  and  $28.0  million,
respectively.  These reductions were partially offset by the costs of the custom
CD promotion with Pizza Hut,  increased staffing and related costs in connection
with customer service  activities  necessary to support the increase in customer
base and the  marketing  and  advertising  sales  strategy in place in the first
quarter  of 2000,  and  increased  credit  card fees  related  to the  growth in
revenues.

General and Administrative Expense. General and administrative expense increased
by $1.1  million,  or 21.7%,  to $5.8  million for the six months ended June 30,
2000,  compared to $4.7  million for the six months  ended June 30,  1999.  As a
percentage of net sales,  general and  administrative  expense decreased to 7.4%
for the six months ended June 30, 2000 compared to 8.6% for the six months ended
June 30, 1999.  The  increase in dollar  terms is primarily  due to the costs of
additional  personnel  to  support  the  overall  growth  of  CDNOW,   increased
professional  fees, and increased bad debt expense due to the growth in revenue.
The decrease in  percentage  terms is primarily  due to  efficiencies  gained to
require less  general and  administrative  expenses to support a higher  revenue
base.

     Amortization  of Goodwill and Other  Intangibles.  Amortization of goodwill
and other  intangibles  related to the  acquisition of N2K and superSonic  Boom,
Inc.  were  approximately  $16.4  million for the six months ended June 30, 2000
compared  to $9.5  million  for the six months  ended June 30,  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.

Liquidity and Capital Resources.

At June 30, 2000,  CDNOW's cash and cash equivalents were $10.5 million compared
to $20.6 million at December 31, 1999. Net cash used in operating  activities of
$54.2 million for the six months ended June 30, 2000, was primarily attributable
to a net loss of $60.4 million,  of which $20 million was a non-cash  charge for
depreciation  and  amortization  and $1.3  million  was  primarily  related to a
write-off  of  capitalized  software  costs  associated  with the  Cosmic  Music
Network.  Additional  uses of cash  included  a net $20.8  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 $3.1 million  decrease in prepaid  expenses and other assets  primarily due to
the expense of prepaid marketing agreements, a $1.4 million decrease in accounts
receivable due to a decrease in revenue  compared to the fourth quarter of 1999,
and a $1.2 million increase in deferred revenue and deferred rent liability. Net
cash used in operating activities of $30.8 million for the six months ended June
30,  1999 was  primarily  attributable  to a net loss of  $50.8  million  and an
increase  of $1.8  million  in  accounts  receivable  as a result  of  increased
revenues.  These uses of cash were partially  offset by a $12.1 million non-cash
charge for  depreciation  and  amortization,  a $5.2 million decrease in prepaid
expenses  and other  assets  primarily  due to the expense of prepaid  marketing
agreements,  and a $3.8  million net  increase  in accounts  payable and accrued
expenses due to an increase in accrued merchandise costs. The changes in working
capital  exclude  the  impact of the  acquisition  of the  assets  acquired  and
liabilities assumed of N2K as of the merger date, March 17, 1999.

Net cash used in investing activities was approximately $1.2 million for the six
months ended June 30, 2000, relating to the purchases of equipment and leasehold
improvements.  Net cash provided by investing  activities  was $23.6 million for
the six months ended June 30, 1999, which consisted of $25.3 million in net cash
acquired from the acquisition of N2K, partially offset by purchases of equipment
of $1.6 million.

<PAGE> 17

Net cash provided by financing  activities  was $45.3 million for the six months
ended  June 30,  2000.  During the first  quarter  of 2000,  Sony Music and Time
Warner  purchased  $21  million of CDNOW  common  stock and CDNOW  borrowed  $25
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  $211,000.  These  increases  in cash  were  partially  offset  by
approximately   $928,000  of  payments   under   capital  lease  and  term  loan
obligations. Net cash provided by financing activities was approximately $10,000
for the six months ended June 30, 1999 and  consisted of proceeds  from warrants
and options exercised of approximately $520,000, partially offset by payments on
capital leases and term loans of approximately $510,000.

As of June 30, 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 $7.5  million  and $2.8
million during the remaining six months of 2000 and the year ending December 31,
2001, respectively.

Seasonality.

CDNOW  experiences  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.

ITEM 3.  QUALITATIVE AND QUANTITATIVE 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  significant  current  exposure  to foreign  currency  risk
relates to  international  sales.  For the three  months ended June 30, 2000 and
1999,  international sales accounted for approximately 18% and 20% 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 June 30, 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 six months
ended  June 30,  2000 would  have  decreased  by  approximately  $180,000.  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> 18

                                    PART II

                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On or about November 4, 1998, an action entitled  Ticketmaster  Ticketing Co. v.
N2K Inc., a wholly-owned  subsidiary of CDnow,  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  have  completed  discovery  and  trial  is  scheduled  to begin in late
September.

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., a wholly-owned  subsidiary of CDnow,  Inc., as a defendant.  CDnow Online,
Inc.  requested  that  Liquid  Audio  indemnify  it against  the Parsec  claims,
pursuant to the  indemnification  provisions of the Order Fulfillment  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. The parties are
in the process of conducting discovery in preparation for trial.

CDNOW and N2K have been named  defendants  in an action  brought by BPW Rhythmic
Records,  L.L.C.,  which is  pending  in U.S.  District  Court for the  Southern
District of New York in New York City 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.  The parties are in the process of
conducting discovery in preparation for trial.

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.

<PAGE> 19

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 an Agreement of Merger and  Contribution
with Sony and Time Warner to combine its business with Columbia  House. On March
13, 2000,  Sony,  Time Warner and CDNOW  mutually  consented  to  terminate  the
Agreement of Merger and Contribution  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. As of June 30, 2000, CDNOW had borrowed $25 million
under the  convertible  debenture.  On July 13, 2000,  the  remaining $5 million
available under the convertible loan agreement was borrowed.  CDNOW is currently
using the proceeds to fund working  capital  requirements.  As of June 30, 2000,
neither Sony Music nor Time Warner had converted  any portion of the  borrowings
or accrued  interest into CDNOW common stock.  On August 3, 2000,  all principal
and accrued interest of  approximately  $31 million was repaid to Sony Music and
Time Warner, and the rights of Sony Music and Time Warner to convert outstanding
principal and interest  under the  Convertible  Debt Agreement into CDNOW common
stock were cancelled.

On July 19, 2000, CDNOW,  Bertelsmann,  and BINC Acquisition Corp.  ("BINC"),  a
wholly-owned  subsidiary of  Bertelsmann,  entered into an Agreement and Plan of
Merger under which Bertelsmann offered to acquire all of the outstanding capital
stock of CDNOW for $3.00 per share in cash.  The tender offer  commenced on July
26, 2000 and is  scheduled  to expire on August 22, 2000 at midnight  (EDT).  In
addition to the Agreement and Plan of Merger, CDNOW and Bertelsmann entered into
a Convertible Loan Agreement.  The Convertible Loan Agreement provides for loans
from  Bertelsmann to CDNOW in an aggregate  principal amount up to approximately
$43 million. On August 3, 2000, approximately $31 million of loan proceeds drawn
under the  Convertible  Loan  Agreement  were used to repay all amounts due Time
Warner  and Sony  Music.  The  remaining  $12  million  will be used to meet the
working  capital needs of CDNOW during the period from July 31, 2000 through the
earlier  of  October  31,  2000  or  the  termination  of the  Convertible  Loan
Agreement.  Bertelsmann may, at any time,  convert any portion of the borrowings
and accrued  interest into CDNOW common stock at a conversion price of $1.50 per
share,  provided that in no event will  Bertelsmann  be entitled to receive more
than 49% of the  outstanding  CDNOW common stock on a fully-diluted  basis.  The
securities  represented by the Convertible  Loan Agreement have been offered and
sold in reliance upon Section 4(2) of the Securities Act of 1933, as amended.

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

None

<PAGE> 20

SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                             CDnow, Inc.



Date:  August 14, 2000                       /s/ Jason Olim
                                             -----------------------------------
                                                                   President and
                                                         Chief Executive Officer



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