<PAGE>   1
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996
                                                     REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
 
                                    N2K INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                               <C>                               <C>
             DELAWARE                            7375                           06-1455771
   (State or other jurisdiction           (Primary Standard                  (I.R.S. Employer
of incorporation or organization)   Industrial Classification Code         Identification No.)
                                               Number)
</TABLE>
 
                                    N2K INC.
                          55 BROAD STREET, 10TH FLOOR
                            NEW YORK, NEW YORK 10004
                                 (212) 378-5555
   (Address, including zip code and telephone number, including area code, of
                   registrant's principal executive offices)
 
                              JONATHAN V. DIAMOND
                                 VICE CHAIRMAN
                                    N2K INC.
                          55 BROAD STREET, 10TH FLOOR
                            NEW YORK, NEW YORK 10004
                                 (212) 378-5555
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
 
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
                          SERVICE, SHOULD BE SENT TO:
 
<TABLE>
<S>                                    <C>
     FRANK E. MORGAN II, ESQ.                 JULIE M. ALLEN, ESQ.
         DEWEY BALLANTINE               O'SULLIVAN GRAEV & KARABELL, LLP
    1301 AVENUE OF THE AMERICAS               30 ROCKEFELLER PLAZA
     NEW YORK, NEW YORK 10019               NEW YORK, NEW YORK 10112
          (212) 259-8000                         (212) 408-2400
</TABLE>
 
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:  As soon
as practicable after the effective date of this Registration Statement.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:  / /
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering:  / /
- ---------------
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:  / /
- ---------------
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box:  / /
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
                                                                           PROPOSED
                                                         PROPOSED          MAXIMUM
                                   NUMBER OF SHARES      MAXIMUM          AGGREGATE         AMOUNT OF
      TITLE OF EACH CLASS OF            TO BE         OFFERING PRICE       OFFERING        REGISTRATION
   SECURITIES TO BE REGISTERED      REGISTERED(1)      PER SHARE(2)      PRICE(1)(2)          FEE(3)
- ----------------------------------------------------------------------------------------------------------
<S>                               <C>               <C>               <C>               <C>
Common Stock, par value
  $0.001 per share................     2,990,000           $12           $35,880,000        $12,372.41
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Includes 390,000 shares which the Underwriters have an option to purchase
     from the Company to cover over-allotments, if any.
 
(2) Estimated solely for purposes of determining the registration fee pursuant
     to Rule 457 under the Securities Act of 1933.
 
(3) Calculated pursuant to Rule 457(a).
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2
 
                                    N2K INC.
 
                             CROSS-REFERENCE SHEET
  PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF
                   INFORMATION REQUIRED BY ITEMS OF FORM S-1
 
<TABLE>
<CAPTION>
                      FORM S-1
              ITEM NUMBER AND HEADING                        LOCATION IN THE PROSPECTUS
- ----------------------------------------------------  -----------------------------------------
<C>   <S>  <C>                                        <C>
  1.  Forepart of the Registration Statement and
        Outside Front Cover Page of Prospectus......  Outside Front Cover Page
  2.  Inside Front and Outside Back Cover Pages of
        Prospectus..................................  Inside Front and Outside Back Cover Pages
  3.  Summary Information, Risk Factors and Ratio of
        Earnings to Fixed Charges...................  Prospectus Summary; Risk Factors
  4.  Use of Proceeds...............................  Prospectus Summary; Use of Proceeds
  5.  Determination of Offering Price...............  Underwriting
  6.  Dilution......................................  Dilution
  7.  Selling Security Holders......................  Not Applicable
  8.  Plan of Distribution..........................  Outside Front Cover Page; Underwriting
  9.  Description of Securities to be Registered....  Description of Capital Stock
 10.  Interests of Named Experts and Counsel........  Not Applicable
 11.  Information With Respect to the Registrant:
      (a)  Description of Business..................  Prospectus Summary; Business
      (b)  Description of Property..................  Business -- Property
      (c)  Legal Proceedings........................  Business -- Legal Proceedings
      (d)  Market Price of and Dividends on the
             Registrant's Common Equity and Related
             Stockholder Matters....................  Outside Front Cover Page; Dividend
                                                      Policy; Selected Consolidated Financial
                                                        Data; Description of Capital Stock;
                                                        Shares Eligible for Future Sale
      (e)  Financial Statements.....................  Consolidated Financial Statements
      (f)  Selected Financial Data..................  Selected Consolidated Financial Data
      (g)  Supplementary Financial Information......  Not Applicable
      (h)  Management's Discussion and Analysis of
             Financial Condition and Results of
             Operations.............................  Management's Discussion and Analysis of
                                                        Financial Condition and Results of
                                                        Operations
      (i)  Changes in and Disagreements with
             Accountants on Accounting and Financial
             Disclosure.............................  Not Applicable
      (j)  Directors and Executive Officers.........  Management
      (k)  Executive Compensation...................  Management
      (l)  Security Ownership of Certain Beneficial
             Owners and Management..................  Principal Stockholders
      (m)  Certain Relationships and Related
             Transactions...........................  Certain Transactions
 12.  Disclosure of Commission Position on
        Indemnification for Securities Act            Not Applicable
        Liabilities.................................
</TABLE>
<PAGE>   3
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
PROSPECTUS (Subject to Completion)
Dated June 21, 1996
                                2,600,000 SHARES
 
                                     [LOGO]
 
                                    N2K INC.
 
                                  COMMON STOCK
                         ------------------------------
     All of the 2,600,000 shares of Common Stock offered hereby are being sold
by N2K Inc. ("N2K" or the "Company"). Prior to the Offering, there has been no
public market for the Common Stock. The Company intends to apply for quotation
of the Common Stock on the Nasdaq National Market under the trading symbol
"NTKI." It is currently estimated that the initial public offering price will be
between $10.00 and $12.00 per share. See "Underwriting" for certain factors to
be considered in determining the initial public offering price.
                         ------------------------------
        THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
                    BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
                         ------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
    EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
       SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
          COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
              PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
                  IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                           Underwriting
                                        Price to           Discounts and         Proceeds to
                                         Public           Commissions(1)         Company(2)
<S>                               <C>                  <C>                  <C>
- -------------------------------------------------------------------------------------------------
Per Share.......................            $                    $                    $
Total(3)........................            $                    $                    $
</TABLE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
(1) The Company has agreed to indemnify the Underwriters against certain
     liabilities, including liabilities under the Securities Act of 1933. See
     "Underwriting."
 
(2) Before deducting expenses payable by the Company, estimated to be
     $          .
 
(3) The Company has granted the Underwriters an option, exercisable within 30
     days of the date of this Prospectus, to purchase an aggregate of up to
     390,000 additional shares of the Common Stock at the Price to Public, less
     Underwriting Discounts and Commissions, to cover over-allotments, if any.
     If all such additional shares are purchased, the total Price to Public,
     Underwriting Discounts and Commissions and Proceeds to Company will be
     $          , $          and $          , respectively.
                         ------------------------------
     The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York, on or about              , 1996.
 
COWEN & COMPANY
                              OPPENHEIMER & CO., INC.
                                                                UNTERBERG HARRIS
 
             , 1996
<PAGE>   4
 
                         ------------------------------
 
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>   5
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option
and gives effect to (a) the 1-for-3 reverse stock split of each outstanding
share of Common Stock in N2K Inc., a Pennsylvania corporation, to be effected
prior to the reorganization of N2K Inc. as a Delaware corporation, (b) the
reorganization of N2K Inc. as a Delaware corporation immediately prior to the
date of this Prospectus and (c) the automatic conversion of all outstanding
shares of the Company's Preferred Stock, $.001 par value per share (the
"Preferred Stock"), into an aggregate of 5,867,108 shares of Common Stock upon
the consummation of the Offering (the "Preferred Stock Conversion"). Fiscal year
references are to the respective fiscal year ended December 31.
 
                                  THE COMPANY
 
     N2K is a music entertainment company focused on providing original content,
interactive programming and recorded music using the Internet as a new global
marketing, promotion and distribution medium. By combining its music industry
and technical expertise, N2K has created an interactive, entertaining and
content-rich online environment, which includes its award-winning merchandising
website, Music Boulevard, music genre websites, Jazz Central Station and
Rocktropolis, and individual artist websites for such artists as David Bowie and
the Rolling Stones. These websites provide a comprehensive entertainment and
information resource enabling users to search and sample music and artist
information interactively through sound, video and graphics. Each of the music
genre and individual artist websites features a hotlink directly with Music
Boulevard to facilitate purchases of CDs, cassettes and related merchandise. The
Company plans to introduce its own recorded music label, N2K Encoded Music, with
its first release scheduled for October 1996. N2K expects that all of its N2K
Encoded Music CDs will be enhanced with multimedia capabilities and will be
marketed and sold through the Company's Internet websites as well as through
traditional retail and other distribution channels. The Company believes that
its strategy of combining Internet content, interactive sales and music produced
on its own label will enhance its ability to create compelling music brand
names, address the broadest possible music audience and build a customer base
focused on targeted music interests. The Company believes that its interactive
sales channel will also provide a new targeted advertising, promotion and
distribution medium for the music industry that will reach a global user base
and that this medium will shift the way music is marketed to consumers.
 
     Music Boulevard (WWW.MUSICBLVD.COM) was launched in August 1995, and Jazz
Central Station (WWW.JAZZCENTRALSTATION.COM) was introduced in January 1996.
Jazz Central Station is the official online website for George Wein's Festival
Productions, producer of the JVC Jazz Festivals, and the Monterey Jazz Festival
for 1996. On June 21, 1996, the Company acquired the rock website, Rocktropolis
(WWW.ROCKTROPOLIS.COM), which was launched in June 1995 and which will be
integrated with the Company's existing websites. Additional music genre websites
are scheduled for release in 1996 and 1997. The Company's website strategy is to
build worldwide online communities around specific music genres where people may
socialize with each other and their favorite artists in a personal environment.
The Company believes that organizing its websites by genres, such as rock, jazz
and classical music, parallels traditional radio play formats and consumer
buying patterns and opens the interactive buying experience to the broadest
possible audience. As part of its strategy to provide locally tailored content,
the Company's first foreign language website will be launched in Japan in June
1996. The Company's revenues from its online music entertainment business have
grown from approximately $85,000 in the fourth quarter of 1995 to approximately
$217,000 in the first quarter of 1996. Substantially all of these revenues were
from the sale of CDs and cassettes produced by other labels.
 
     On February 13, 1996, N2K Inc., a developer of online music entertainment
content was merged with and into Telebase Systems, Inc., a provider of online
information services that changed its name to N2K Inc. To date, substantially
all of the Company's revenues have been from its online information retrieval
services. The Company believes that its ability to aggregate content from a wide
variety of sources, its database management skills and the infrastructure
provided by its information services business will enhance N2K's
 
                                        3
<PAGE>   6
 
ability to scale the infrastructure to facilitate the Company's growth and to
create proprietary databases for targeted marketing to music consumers. In
addition, the Company continues to serve its online business information
services distributors while also developing web-based software products and
information services for the business and small office/home office ("SOHO")
markets.
 
     The Company believes that its management team brings together a unique
blend of experience in managing music industry and artist relationships,
merchandising recorded music, developing online services and in database
management. Larry Rosen, Dave Grusin and Jon Diamond managed GRP Records
("GRP"), one of the first worldwide record labels to digitally produce music
titles from concept through finished recording. With more than 75 Grammy
nominations and 20 Grammy awards to its credit, GRP became a leading independent
recorded music label and was purchased by MCA Inc. in 1990. Jim Coane and Bruce
Johnson have more than 15 years of combined experience with Telebase developing
and managing database online information services.
 
     The Company's executive offices are located at 55 Broad Street, New York,
New York 10004, and its telephone number at that address is (212) 378-5555.
 
                                  THE OFFERING
 
Common Stock Offered................     2,600,000 shares
 
Common Stock to be outstanding after
the Offering(1).....................     12,421,711 shares
 
Use of Proceeds.....................     The net proceeds from the Offering will
                                           be used by the Company for sales and
                                           marketing, research and development,
                                           working capital and other general
                                           corporate purposes, which may include
                                           acquisitions of or investments in
                                           complementary businesses, products
                                           and technologies.
 
Proposed Nasdaq National Market
Symbol..............................     NTKI
- ------------------------------
 
(1) Based on shares outstanding as of June 21, 1996. Excludes (i) 1,880,952
     shares of Common Stock issuable upon exercise of outstanding options, (ii)
     2,571,403 shares of Common Stock reserved for future grants under the
     Company's stock option and purchase plans and (iii) 135,555 shares of
     Common Stock reserved for issuance pursuant to the exercise of outstanding
     warrants. The weighted average exercise price of all outstanding options
     and warrants is $2.74 per share. See "Management -- Stock Plans,"
     "Description of Capital Stock" and Note 5 of Notes to Consolidated
     Financial Statements.
 
                                        4
<PAGE>   7
 
                   SUMMARY CONSOLIDATED FINANCIAL INFORMATION
 
     The following summary financial information should be read in conjunction
with the Consolidated Financial Statements of the Company and the notes thereto,
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
 
<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED
                                         YEAR ENDED DECEMBER 31,                  MARCH 31,
                                 ---------------------------------------   ------------------------
                                    1993          1994          1995          1995         1996
                                 -----------   -----------   -----------   ----------   -----------
<S>                              <C>           <C>           <C>           <C>          <C>
STATEMENT OF OPERATIONS DATA:
  Revenues:
     Entertainment.............  $   --        $   --        $    96,505   $   --       $   216,800
     Information services......   10,360,257    11,391,780    10,976,711    3,204,151     2,514,382
                                 -----------   -----------   -----------   ----------   -----------
                                  10,360,257    11,391,780    11,073,216    3,204,151     2,731,182
                                 -----------   -----------   -----------   ----------   -----------
  Cost of revenues:
     Entertainment.............      --            --             85,176       --           213,003
     Information services......    5,747,293     6,558,541     6,489,472    1,863,647     1,591,641
                                 -----------   -----------   -----------   ----------   -----------
                                   5,747,293     6,558,541     6,574,648    1,863,647     1,804,644
                                 -----------   -----------   -----------   ----------   -----------
       Gross profit............    4,612,964     4,833,239     4,498,568    1,340,504       926,538
                                 -----------   -----------   -----------   ----------   -----------
  Operating expenses:
     Operating and
       development.............    1,350,057     1,777,654     2,267,852      536,721     1,247,573
     Sales and marketing.......    1,213,829     1,364,198     2,575,618      501,172       430,993
     General and
       administrative..........    1,471,150     1,564,658     1,337,731      343,241       507,255
     Charge for purchased
       research and
       development(1)..........      --            --            --            --         4,133,281
                                 -----------   -----------   -----------   ----------   -----------
       Operating income
          (loss)...............      577,928       126,729    (1,682,633)     (40,630)   (5,392,564)
  Interest income..............       43,761        73,359       106,370       27,683        24,904
  Interest expense.............      (82,890)      (48,398)      (18,237)      (3,544)      (16,552)
                                 -----------   -----------   -----------   ----------   -----------
       Income (loss) before
          income taxes.........      538,799       151,690    (1,594,500)     (16,491)   (5,384,212)
  Income taxes.................       33,913         9,280           300          663       --
                                 -----------   -----------   -----------   ----------   -----------
       Net income (loss).......  $   504,886   $   142,410   $(1,594,800)  $  (17,154)  $(5,384,212)
                                  ==========    ==========    ==========    =========    ==========
  Pro forma net loss per common
     share(2)..................                              $     (0.15)  $            $     (0.49)
                                                              ==========                 ==========
  Shares used in computing pro
     forma net loss per common
     share(2)..................                               10,939,989                 10,925,422
                                                              ==========                 ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                       MARCH 31, 1996
                                                         -------------------------------------------
                                                           ACTUAL     PRO FORMA(3)   AS ADJUSTED(4)
                                                         ----------   ------------   ---------------
<S>                                                      <C>          <C>            <C>
BALANCE SHEET DATA:
  Working capital......................................  $1,070,133   $ 16,970,133     $42,868,133
  Total assets.........................................   5,806,745     21,706,745      47,604,745
  Stockholders' equity.................................   2,416,338     18,316,338      44,214,338
</TABLE>
 
                                        5
<PAGE>   8
 
- ------------------------------
 
(1) On February 13, 1996, N2K Inc., a New York corporation ("New York N2K"),
     which was founded in 1995 as a developer of online music entertainment
     content, was merged with and into Telebase Systems, Inc. ("Telebase"), a
     Pennsylvania corporation formed in 1984 as a provider of online information
     services (the "Merger"). In connection with the Merger, the Company
     incurred a one-time charge for purchased research and development. See
     Notes 1 and 2 of Notes to Consolidated Financial Statements.
 
(2) Reflects the conversion of all outstanding shares of the Company's Preferred
     Stock into Common Stock upon consummation of the Offering. See Note 1 of
     Notes to Consolidated Financial Statements. If the Merger had occurred on
     January 1, 1995, the pro forma results would have been as follows:
 
<TABLE>
<CAPTION>
                                                                               THREE MONTHS
                                                           YEAR ENDED             ENDED
                                                        DECEMBER 31, 1995     MARCH 31, 1995
                                                        -----------------     --------------
        <S>                                             <C>                   <C>
        Unaudited pro forma revenues..................     $11,216,842         $  2,799,809
                                                           ===========          ===========
        Unaudited pro forma net loss..................     $(2,839,579)        $ (1,634,819)
                                                           ===========          ===========
        Unaudited pro forma net loss per Common
          share.......................................     $     (0.26)        $      (0.15)
                                                           ===========          ===========
</TABLE>
 
    The above pro forma information for both periods excludes the one-time
    charge of $4.1 million associated with the write-off of purchased research
    and development.
 
(3) Reflects (i) the sale of certain shares of Series E Preferred Stock and
     shares of Series F Preferred Stock subsequent to March 31, 1996, and (ii)
     the automatic conversion of all outstanding shares of the Company's
     Preferred Stock into Common Stock upon consummation of the Offering.
 
(4) Adjusted to give effect to the sale of 2,600,000 shares of Common Stock
     offered hereby at an assumed initial public offering price of $11.00 per
     share and after deducting estimated underwriting discounts and commissions
     and offering expenses. See "Capitalization."
                         ------------------------------
 
     Music Boulevard(R), Telebase(R), EasyNet(R), Corporate EasyNet(R),
ANALY$T(R), ARTIST Gateway(R) and Knowledge Gateway(R) are registered trademarks
of the Company. Jazz Central StationSM and RocktropolisSM are service marks of
the Company. All other trademarks or service marks appearing in this Prospectus
are the property of their respective holders.
 
                                        6
<PAGE>   9
 
                                  RISK FACTORS
 
     Prospective purchasers should consider carefully the following risk
factors, in addition to the other information set forth in this Prospectus,
before purchasing any of the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Actual events or results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under this section
entitled "Risk Factors," as well as those discussed in the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and in the other sections of this Prospectus.
 
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE RESULTS
 
     The Company has incurred significant losses and expects to continue to
incur significant losses on a quarterly and annual basis for the foreseeable
future. As of March 31, 1996, the Company had an accumulated deficit of $13.3
million. Since its inception, the Company has incurred costs to develop and
enhance its technology, to create, introduce and enhance its service offerings,
to establish marketing and distribution relationships and to build an
administrative organization. Since the Merger, the Company has continued these
efforts with an emphasis on increased spending for the development, marketing
and sale of its music entertainment services, in particular those offered
through its Music Boulevard, Jazz Central Station and other planned World Wide
Web (the "Web") sites. To date, the Company has derived its revenues primarily
from the provision of online business information and gateway retrieval
services. The Company recently shifted the focus of its business to music
entertainment delivered via the Internet and expects to derive an increasingly
larger portion of its revenues from the music entertainment business, including
from its planned N2K Encoded Music label and sales of advertising on its
music-related websites. Due to the Company's recent shift in business focus, the
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new, unproven and rapidly
evolving markets. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract, retain and motivate
qualified employees, continue to upgrade its technologies and commercialize its
products and services incorporating such technologies. There can be no assurance
that the Company will be successful in addressing such risks. If the Company is
not successful in developing and expanding its music entertainment business,
including its planned N2K Encoded Music label and sales of advertising on its
music-related websites, the Company's ability to achieve profitability would be
materially adversely affected. In addition, the Company currently intends to
increase substantially its operating expenses to develop new music genre sites,
to enhance existing sites, to fund increased sales and marketing and to expand
its music entertainment operations. To the extent that such expenses precede or
are not subsequently followed by increased revenues, the Company's business,
results of operations and financial condition will be materially adversely
affected. There can be no assurance that the Company will ever be able to
achieve or maintain profitability on a quarterly or annual basis in the future.
See "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
 
DEPENDENCE ON THE INTERNET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR
COMMERCE AND ADVERTISING
 
     Use of the Internet by consumers is at a very early stage of development,
and market acceptance of the Internet as a medium for commerce and advertising
is subject to a high level of uncertainty. The rapid growth of global commerce
and the exchange of information on the Internet and other online networks is new
and evolving, making it difficult to predict whether the Internet will prove to
be a viable commercial marketplace. The Company believes that its future success
will depend on its ability to significantly increase revenues from its music
entertainment operations, which will require the development and widespread
acceptance of the Internet and online services as a medium for commerce and
advertising. In particular, the Company's future financial success will be
dependent on profits from the sale of recorded music under its own label, N2K
 
                                        7
<PAGE>   10
 
Encoded Music, and the sale of advertising on its Internet websites. There can
be no assurance that the Internet will be a successful retailing channel. The
Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as reliable network
backbones, or complementary services, such as high speed modems and security
procedures for financial transactions. Consumer concern over Internet security
has been, and could continue to be, a barrier to commercial activities requiring
consumers to send their credit card information over the Internet. The Internet
has experienced, and is expected to continue to experience, significant growth
in the number of users and amount of traffic. There can be no assurance that the
Internet infrastructure will continue to be able to support the demands placed
on it by sustained growth. In addition, the viability of the Internet may prove
uncertain due to delays in the development and adoption of new standards and
protocols (for example, the next generation Internet Protocol) to handle
increased levels of Internet activity or due to increased government regulation.
If use of the Internet does not continue to grow, or if the necessary Internet
infrastructure or complementary services are not developed to effectively
support growth that may occur, the Company's business, results of operations and
financial condition could be materially adversely affected. In addition, in
order for the Company to generate advertising revenues, advertisers and
advertising agencies must direct a portion of their budgets to the Internet and,
specifically, to the Company's Internet websites. The Company has just recently
begun to sell advertising on its websites and has not recognized material
advertising revenues to date. There can be no assurance that the Company will be
successful in generating significant advertising revenues to date and the
failure to do so would have a material adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
advertisers and advertising agencies will accept the Internet as a medium. If
Internet advertising is not widely accepted by advertisers and advertising
agencies, the Company's business, results of operations and financial condition
could be materially adversely affected. See "Business -- Industry
Overview -- The Internet."
 
UNCERTAIN ACCEPTANCE OF THE COMPANY'S INTERNET CONTENT
 
     The Company's future success will be significantly dependent upon its
ability to create and deliver entertaining and compelling Internet music-related
content in order to attract users to its websites to purchase recorded music and
related merchandise and to attract advertisers to the websites. The Company
launched its first music website, Music Boulevard, in August 1995 and has
limited experience in the online music entertainment business. There can be no
assurance that the Company's content will be attractive to a sufficient number
of users to generate significant merchandising and advertising revenues. There
can also be no assurance that the Company will be able to anticipate, monitor
and successfully respond to rapidly changing consumer tastes and preferences so
as to continually attract a sufficient number of users to its websites. If the
Company is unable to develop Internet content that allows it to attract, retain
and expand a loyal user base, its business, results of operations and financial
condition will be materially adversely affected.
 
COMPETITION
 
     The market for Internet and online content and service providers is highly
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of websites on the Internet competing for consumers'
attention and spending has proliferated. With no substantial barriers to entry,
the Company expects that competition will continue to intensify. In addition to
competing with numerous independent Internet retailers and traditional music
retail chains with websites on the Internet, the Company competes with
traditional retail stores, including chains and megastores, catalog
merchandisers, music clubs and telephone retailers. N2K Encoded Music will
compete with the major, and other independent, record labels. The Company
believes that the primary competitive factors in providing music entertainment
products and services via the Internet are name recognition, variety of
value-added services, ease of use, price, quality of service, availability of
customer support, reliability, technical expertise and experience. The Company's
success in this market will depend heavily upon its ability to provide high
quality, entertaining content, along with cutting-edge technology and
value-added Internet and online services. Other factors that will affect the
Company's success in this market include the Company's continued ability to
attract experienced marketing, sales and management talent, and the expansion of
global support, training and field service capabilities. The Company's failure
to compete successfully in the online music entertainment business would have a
material
 
                                        8
<PAGE>   11
 
adverse effect on the Company's business, results of operations and financial
condition. In addition, the competition for advertising revenues both on the
Internet websites and in more traditional media is intense. To the extent the
Company is not able to attract significant sources of revenues from paid
advertisements on its websites, the Company's business, results of operations
and financial condition will be materially adversely affected.
 
     The market for online information services is both highly competitive and
highly fragmented. As the Company has no exclusive relationships with any of its
information suppliers, many of the Company's competitors offer, or could offer,
content that is similar or the same as that offered by the Company, which could
adversely affect the Company's distribution agreements and utilization by its
end users. In addition, the growing reach and use of the Internet has further
intensified competition in this industry. Consumers have gained free access to
certain information provided directly on the Internet by certain content
providers. To the extent that content providers, including but not limited to
the Company's current suppliers, provide information to users at a lower cost
than the Company or at minimal or no cost, the Company's business, results of
operations and financial condition could be materially adversely affected.
 
     Many of the Company's current and potential competitors in the music
entertainment and online information services businesses have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and larger existing customer bases than the Company. In
addition, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products or services
than the Company. There can be no assurance that the Company will be able to
compete successfully.
 
DEPENDENCE ON KEY CUSTOMERS
 
     The Company presently sells its information services, which accounted for
approximately 99.1% of its revenues in 1995, on a non-exclusive basis to large
companies in the online service industry. In the three months ended March 31,
1996, CompuServe Incorporated ("CompuServe") and NIFTY Corporation ("NIFTY")
accounted for $1.9 million and $301,000, representing 68.9% and 11.0%,
respectively, of revenues. In 1995, CompuServe and NIFTY accounted for $8.5
million and $1.2 million, representing 76.3% and 10.5%, respectively, of
revenues. Similarly, in 1994, CompuServe and NIFTY accounted for $8.5 million
and $1.1 million, representing 74.5% and 9.6%, respectively, of the Company's
revenues. As of March 31, 1996, the Company had accounts receivable from
CompuServe and NIFTY of $1.3 million and $95,000, respectively. As of December
31, 1995, the Company had accounts receivable from CompuServe and NIFTY of $1.2
million and $88,000, respectively. As of December 31, 1994, the Company had
accounts receivable from CompuServe and NIFTY of $1.5 million and $69,000,
respectively. The proliferation of and competition among content providers has
intensified and many content providers are delivering information directly to
consumers on the Internet at minimal or no cost. At the same time, advances in
technology have made it easier for online service providers to develop
information retrieval interfaces. Since the Company does not have any long-term
agreements with, or commitments from, CompuServe or NIFTY, no assurance can be
given that CompuServe and NIFTY will remain customers of the Company. The loss
of either CompuServe or NIFTY as Company customers would have a material adverse
effect on the Company's business, results of operations and financial condition.
Further, the Company relies on the marketing efforts of CompuServe and NIFTY to
the end user. To the extent that CompuServe or NIFTY change their offerings or
strategy, reduce their marketing efforts or experience system failures, the
Company's online information services business may be materially adversely
affected. See "Business -- N2K Information Services."
 
DEPENDENCE ON KEY SUPPLIERS
 
     In the Company's information services business, Knight-Ridder Information,
Inc. ("Knight-Ridder"), a database content provider, accounted for 53.1%, 60.2%
and 59.3% of the cost of revenues for the three months ended March 31, 1996 and
for the years ended December 31, 1995 and 1994, respectively. The Company
renegotiates its supply agreement with Knight-Ridder on an annual basis. No
assurance can be made that Knight-Ridder will continue its supply relationship
with the Company. The termination of such relationship or
 
                                        9
<PAGE>   12
 
a material increase in the cost of Knight-Ridder's services would have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
     In its music entertainment business, the Company currently has a contract
with Valley Record Distributors ("Valley"), which is currently the Company's
single-source provider of order fulfillment for direct-to-consumer recorded
music products. The Company has no fulfillment operation or facility of its own
and, accordingly, is dependent upon maintaining its existing relationship with
Valley or establishing a new fulfillment relationship with a comparable
fulfillment operation. There can be no assurance that the Company will maintain
its relationship with Valley beyond the term of its existing agreement, which
was entered into in May 1995 for a three-year period. The termination of such
relationship would, absent establishing a substitute relationship with one or
more of the few other fulfillers in the industry, have a material adverse effect
on the Company's business, results of operations and financial condition. The
Company believes that alternative suppliers of fulfillment services would be
available on terms satisfactory to the Company should its relationship with
Valley terminate. Nevertheless, an unanticipated termination of the Company's
relationship with Valley, particularly during the fourth quarter in which a high
percentage of recorded music sales are made, could materially adversely affect
the Company's results of operations for the quarter in which such termination
occurred even if the Company was able to establish a relationship with an
alternative fulfillment house. In addition, to the extent that Valley does not
have sufficient capacity and is unable to satisfy on a timely basis increasing
requirements of its customers, including the Company, such capacity constraint
would have a material adverse effect on the Company's business, results of
operations and financial condition.
 
MANAGEMENT OF GROWTH; CHANGING BUSINESS FOCUS; ACQUISITIONS
 
     The Company has recently experienced a period of rapid and significant
growth, including a substantial increase in the number of its employees. Such
growth has placed, and may continue to place, significant demands on the
Company's management, operations and systems. In addition, the Company has
shifted the focus of its business operations to music entertainment. The Company
has only recently consummated the Merger and acquired the rock website,
Rocktropolis. In addition, the Company is launching a graphical user interface
for Music Boulevard on July 1, 1996. To the extent that the Company continues to
grow internally or through additional acquisitions, the Company will be faced
with risks, including risks associated with the assimilation of new operations,
sites and personnel, the diversion of resources from the Company's existing
business and the inability of management to integrate any acquired businesses.
The Company's ability to compete effectively will depend, in part, upon its
ability to overcome these risks and to revise, improve and effectively use its
operational, management, marketing and financial systems, both domestically and
on an international basis, as necessitated by changes in the Company's business.
There can be no assurance that the Company will be able to effectively manage
such growth and changes. Any failure of the Company to effectively manage its
growth and to respond to changes in its business focus would have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
RISKS INHERENT IN THE RECORDED MUSIC INDUSTRY AND RECORD LABEL LAUNCH
 
     The recorded music industry, like other creative industries, involves a
substantial degree of risk. Each recording is an individual artistic work, and
its commercial success is primarily determined by consumer taste, which is
unpredictable and constantly changing. Accordingly, there can be no assurance as
to the financial success of any particular release, the timing of any such
success or the popularity of any particular artist, or the Company's ability to
attract and sign artists to N2K Encoded Music. Furthermore, the Company believes
that it is standard practice in the recorded music industry for record companies
to pay substantial advances to artists. If the Company were to pay its artists
such advances, it could incur significant expenses which could materially
adversely affect the Company's results of operations. If the Company were not to
pay such advances, it would be competing for artistic talent at a disadvantage
to other record labels that do pay such advances. The Company has not yet
produced or introduced any titles under the N2K Encoded Music label. There can
be no assurance that the Company will be able to generate sufficient revenues
from successful releases to cover the costs of unsuccessful releases. The
Company has no distribution arrangement for N2K Encoded Music. The Company is
presently evaluating potential distribution arrangements. The success of the
 
                                       10
<PAGE>   13
 
Company's N2K Encoded Music is dependent upon developing and maintaining such
distribution relationships. Management believes that it will be able to develop
and maintain such relationships on terms satisfactory to the Company. The
failure of the Company to develop and/or maintain such distribution
relationships would have a material adverse effect on the Company's business,
results of operations and financial condition. The record industry is dominated
by a small number of large record companies that have significantly greater
experience and financial, marketing and distribution resources than the Company.
There can be no assurance of the Company's ability to complete effectively in
that market. The failure of the Company to establish and grow N2K Encoded Music
would have a material adverse on the Company's growth, financial condition and
results of operations. See "Business -- Entertainment Products and
Services -- Planned Record Label."
 
EVOLVING MARKETS FOR INFORMATION SERVICES
 
     The Company's information services are offered in markets that are rapidly
evolving and are characterized by an increasing number of market entrants that
have introduced or developed services addressing information search and
retrieval requirements over private and public networks, online services and the
Internet. At the same time, many content providers, particularly general
reference content providers, have begun to provide direct access to information
on the Internet at minimal or no cost. The Company's revenues from general
reference information services have declined. In response to changes in the
information services market, the Company has unbundled its services, reduced its
prices and re-focused its marketing strategy to emphasize premium-priced
databases and new Web-based products and services for the business and SOHO
markets. There can be no assurance that the Company will be able to maintain or
grow its information services business. Failure to maintain or grow its
information services business would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's success depends to a significant extent on the continued
contributions of its senior management team, and technical and marketing
personnel. In particular, the Company's music entertainment business is highly
dependent upon the services and music industry expertise of Larry Rosen, Dave
Grusin and Jon Diamond. The Company does not maintain "key man" life insurance
for any of its employees. The Company does have employment agreements with
Messrs. Rosen, Diamond and Grusin and certain other members of senior
management. However, such employment agreements do not necessarily assure the
services of such employees. The Company's success also depends on its ability to
attract and retain additional qualified employees. Competition for qualified
personnel is intense and there are a limited number of persons with knowledge of
and experience in the Internet service industry. Despite employment agreements
and non-competition arrangements with certain members of management, the
Company's employees may voluntarily terminate their employment with the Company
at any time. There can be no assurance that the Company will be able to retain
its key personnel. The loss of one or more key employees could have a material
adverse effect on the Company. See "Business -- Employees" and "Management."
 
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
 
     The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including demand
for the Company's services, the timing of the introduction or enhancement of
websites and services by the Company and its competitors, market acceptance of
new services, the mix of products and services sold, seasonality of the
information services markets and recorded music industry, seasonality in
advertising sales, the timing of new releases by the Company's planned record
label, technical difficulties and system downtime and general economic
conditions. The Company has historically experienced decreases in revenues and
net income from its information retrieval services during both the third and
fourth fiscal quarters. In addition, the Company anticipates that revenues from
its music entertainment business will track traditional consumer music-buying
habits. Therefore, music revenues are expected to decline during the summer
months of the second and third fiscal quarters and to increase during
 
                                       11
<PAGE>   14
 
the late fourth-quarter peak holiday season. As a result, the Company believes
that period-to-period comparisons of its results of operations are not and will
not necessarily be meaningful and should not be relied upon as an indication of
future performance. Due to all of the foregoing factors, it is possible that in
some future quarter or quarters the Company's operating results will be below
the expectations of securities analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
RISKS ASSOCIATED WITH GLOBAL EXPANSION
 
     A key component of the Company's strategy is its planned expansion into
global markets. There can be no assurance that the Company will be able to
successfully market, sell and distribute its services in global markets due to
legal, contractual and practical considerations. The Company does not currently
have any overseas distribution facility or arrangement and there can be no
assurance that the Company will be able to expand its global presence. In
addition, there are certain risks inherent in doing business on a global level,
such as unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, difficulties in protecting intellectual property rights, longer
payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates and potentially adverse tax
consequences, which could adversely impact the success of the Company's global
operations. There can be no assurance that one or more of such factors will not
have a material adverse effect on the Company's future global operations, and
consequently, on the Company's business, results of operations and financial
condition.
 
RISK OF SYSTEM FAILURE OR INADEQUACY
 
     The Company's operations are dependent on its ability to maintain its
computer and telecommunications equipment in effective working order and to
protect its systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. In addition, the growth of the
Company's customer base, generated through its music entertainment and/or
information services, may strain or exceed the capacity of its computer and
telecommunications systems and lead to degradations in performance or systems
failure. From time to time, the Company has experienced capacity constraints and
failure of its information systems which has resulted in decreased levels of
service delivery or interruptions in service to its customers. While the Company
continually reviews and seeks to upgrade its technical infrastructure and
provides for certain system redundancies and backup power to limit the
likelihood of systems overload or failure, any damage, failure or delay that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, substantially all of the Company's computer and telecommunications
operations, including its processing operations, are located at its facility in
Wayne, Pennsylvania. Although the Company maintains insurance, such insurance
may not be adequate to compensate the Company for all property damage and
business interruption losses that may occur.
 
UNCERTAIN ACCESS TO CONTENT
 
     The Company believes that it will be necessary to continue to license both
information and entertainment content from content providers. While the Company
intends to continue adding new content to its entertainment and information
services, there can be no assurance the Company will be able to maintain its
current agreements with content providers or enter into agreements with
additional content providers. Failure to do so may have a material adverse
affect on the Company's business, results of operations and financial condition.
 
SECURITY RISKS
 
     Despite the implementation of network security measures by the Company, its
infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by its customers or others. Computer viruses,
break-ins or other security problems could lead to misappropriation of
proprietary information and interruptions, delays or cessation in service to the
Company's customers. Moreover, until
 
                                       12
<PAGE>   15
 
more comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet as a merchandising medium.
 
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
 
     The Company's success will depend upon its ability to develop and provide
new services that meet customers' changing requirements. The music entertainment
industry has been characterized by significant technological changes, such as
the introduction of CDs which have had a significant impact on the industry and
industry participants, and further technological changes are expected to occur.
The Internet service market is characterized by rapidly changing technology,
evolving industry standards, changes in customer needs and frequent new service
and product introductions. The Company's future success will depend, in part, on
its ability to effectively use leading technologies, to continue to develop its
technological expertise, to enhance its current services, to develop new
services that meet changing customer needs and to influence and respond to
emerging industry standards and other technological changes on a timely and
cost-effective basis. See "Business -- N2K Technology."
 
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
 
     The Company is subject, both directly and indirectly, to various laws and
governmental regulations relating to its business. The Company believes it is
currently in compliance with such laws and that they do not have a material
impact on its operations. Moreover, there are currently few laws or regulations
directly applicable to access to or commerce on commercial online services or
the Internet. However, due to the increasing popularity and use of commercial
online services and the Internet, it is possible that a number of laws and
regulations may be adopted with respect to commercial online services and the
Internet. Such laws and regulations may cover issues such as user privacy,
pricing and characteristics and quality of products and services. The
Telecommunications Act of 1996, which was recently enacted, imposes criminal
penalties for transmission of or allowing access to certain obscene
communications over the Internet and other computer services and contains
additional provisions intended to protect minors. Such provisions of the Tele-
communications Act have been challenged on constitutional and other grounds and
the outcome of such challenges is uncertain. The enactment of the
Telecommunications Act, and any similar laws or regulations in the future, may
decrease the growth of commercial online services and the Internet, which could
in turn decrease the demand for the Company's services and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
applicability to commercial online services and the Internet of existing laws
governing issues such as property ownership, libel and personal privacy is
uncertain and could expose the Company to substantial liability for which the
Company might not be indemnified by content providers. See "-- Liability for
Information Retrieved from the Internet." The Company believes that its use of
material on its websites is protected under current provisions of copyright law.
However, legal rights to certain aspects of online and Internet content and
commerce are not clearly settled. There can be no assurance that the Company
will be able to continue to maintain rights to information, including
downloadable music samples and artist, record and other information. The failure
to be able to offer such information would have a material adverse effect on the
Company's business, results of operations and financial condition.
 
LIABILITY FOR INFORMATION RETRIEVED FROM THE INTERNET
 
     Due to the fact that materials may be downloaded by the online or Internet
services operated by the Company or the Internet access providers with which it
has relationships and may be subsequently distributed to others, there is a
potential that claims will be made against the Company for defamation,
negligence, copyright or trademark infringement or other theories based on the
nature and content of such materials. Such claims have been brought, and
sometimes successfully pressed, against online services in the past. In
addition, the Company could be exposed to liability with respect to the
selection of listings that may be accessible through the Company's branded
products and websites. For example, claims could be made against the Company if
material deemed inappropriate for viewing by children could be accessed through
Music Boulevard. Although the Company carries general liability insurance, the
Company's insurance may not cover
 
                                       13
<PAGE>   16
 
potential claims of this type or may not be adequate to cover all costs incurred
in defense of potential claims or to indemnify the Company for all liability
that may be imposed. Any costs or imposition of liability that is not covered by
insurance or in excess of insurance coverage could have a material adverse
effect on the Company's business, results of operations and financial condition.
 
CONTROL BY MANAGEMENT
 
     The Company's executive officers and directors and their respective
affiliates will beneficially own an aggregate of 39.3% of the Company's
outstanding shares of Common Stock after the Offering (38.0% if the
Underwriters' over-allotment option is exercised in full). Such stockholders, if
voting together, may, as a practical matter, have sufficient voting power to
elect the board of directors of the Company (the "Board of Directors"), exercise
significant control over the business, policies and affairs of the Company and,
in general, determine the outcome of any corporate transaction or other matters
submitted to the stockholders for approval, such as any amendment to the
certificate of incorporation of the Company (the "Certificate of
Incorporation"), any merger, consolidation, sale of all or substantially all of
the Company's assets or "going private" transactions and prevent or cause a
change in control of the Company, all of which may adversely affect the market
price of the Common Stock. See "Principal Stockholders."
 
ANTI-TAKEOVER PROVISIONS
 
     Certain provisions of the Delaware General Corporation Law (the "Delaware
GCL") may delay, discourage or prevent a change in control of the Company. Such
provisions may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price and the
voting and other rights of the holders of Common Stock. In addition, the Board
of Directors has the authority without action by the Company's shareholders to
fix the rights, privileges and preferences of and to issue shares of the
Company's preferred stock, par value $.001 per share (the "Preferred Stock"),
which may have the effect of delaying, deterring or preventing a change in
control of the Company. See "Description of Capital Stock -- Preferred Stock"
and "-- Anti-Takeover Effects of Delaware Law."
 
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
 
     Prior to the Offering, there has been no public market for the Common
Stock. The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the trading symbol "NTKI." There can be no assurance,
however, that an active public market will develop for the Common Stock. The
initial public offering price will be determined through negotiations between
the Company and the Representatives of the Underwriters, and may not be
indicative of the market price for the Common Stock after the completion of the
Offering. Among the factors to be considered in such negotiations are prevailing
market conditions, the results of operations of the Company in recent periods,
the market capitalizations and stages of development of other companies which
the Company and the Representatives of the Underwriters believe to be comparable
to the Company, estimates of the business potential of the Company, the present
state of the Company's development and other factors, if any, deemed relevant.
See "Underwriting."
 
     Moreover, the trading price of the Company's Common Stock could be subject
to fluctuations in response to quarterly variations in results of operations,
announcements of technological innovations or new services or products by the
Company or its competitors, changes in financial estimates by securities
analysts and other events or factors. See "-- Potential Fluctuations in
Quarterly Results; Seasonality." Recent history relating to the market prices of
other newly public companies indicates that the market price of the Company's
Common Stock following the Offering may be highly volatile. At various times,
the stock market has experienced volatility that has particularly affected the
market prices for stock of particular industry groups, such as technology
companies, particularly Internet-related companies, often without regard to a
particular company's operating results.
 
                                       14
<PAGE>   17
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
 
     After the completion of the Offering, 12,421,711 shares of Common Stock
will be outstanding. Of such shares, the 2,600,000 shares sold pursuant to the
Offering will be tradeable without restriction by persons other than
"affiliates" of the Company. The remaining 9,821,711 shares of Common Stock to
be outstanding after the Offering are "restricted securities" within the meaning
of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act")
and may not be publicly resold, except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, including that provided by Rule 144 promulgated under the
Securities Act. 4,941,777 shares of Common Stock will be available for immediate
resale upon the consummation of the Offering without restriction pursuant to the
exemption provided by Rule 144(k), subject in certain cases to expiration of the
180-day lock-up period. The directors and executive officers of the Company and
other stockholders of the Company, who collectively hold      shares, or
approximately      %, of the outstanding shares of Common Stock, have agreed not
to, directly or indirectly, offer, sell, assign, transfer, encumber, pledge,
contract to sell, grant an option to purchase or otherwise dispose of any Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Cowen & Company. Upon expiration of the 180-day period,
4,899,983 shares of Common Stock will be eligible for immediate resale without
restriction under the Securities Act, subject, in certain cases, to certain
volume, timing and other requirements of Rule 144 promulgated under the
Securities Act. The Company intends to file one or more Registration Statements
on Form S-8 immediately following the Offering, registering under the Securities
Act an aggregate of 4,452,354 shares of Common Stock covered by the Company's
stock option and purchase plans. In addition, certain stockholders of the
Company are entitled to both demand and incidental registration rights with
respect to 5,808,179 shares of Common Stock. The Company has obtained the
consent of stockholders holding      shares, or      %, of the Common Stock
entitled to demand registration rights any time 180 days after the date of this
Prospectus to delay the effectiveness of any registration statement pursuant to
a demand request until the expiration of the 270-day period after the date of
this Prospectus, to the extent requested by the Representatives. After the
expiration of the 180-day period or the 270-day period, as applicable, such
holders may exercise such rights, which could result in a large number of shares
being sold in the public market and could have an adverse effect on the market
price for the Common Stock. No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sale, will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock.
See "Description of Capital Stock -- Registration Rights," "Shares Eligible for
Future Sale" and "Underwriting."
 
SUBSTANTIAL DILUTION
 
     Purchasers of the Common Stock offered hereby will experience immediate
dilution in the pro forma net tangible book value per share of $7.45 at an
assumed initial public offering price of $11.00 per share and after deducting
estimated underwriting discounts and commissions and offering expenses. In
addition, as of June 21, 1996, the Company had granted warrants to purchase
135,555 shares of Common Stock, and options to purchase 1,880,952 shares of
Common Stock. If such warrants and options are exercised in full, purchasers of
the Common Stock offered hereby would experience an immediate and substantial
dilution in the net tangible book value per share of $7.56. See "Dilution."
 
ABSENCE OF DIVIDENDS
 
     The Company has never declared or paid any dividends on the Common Stock
and does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
 
POSSIBLE NEED FOR ADDITIONAL FUNDS
 
     Based on current levels of operations and planned growth, the Company
anticipates that its existing capital resources, together with the proceeds of
the Offering, will enable it to maintain its operations for at least two years
from the date of this Prospectus. However, the Company may require additional
funds to sustain and expand its sales and marketing and research and development
activities, particularly if a well-
 
                                       15
<PAGE>   18
 
financed competitor emerges or if there is a shift in the type of Internet or
online information services that are developed and ultimately receive customer
acceptance. Adequate funds for these and other purposes on terms acceptable to
the Company, whether through additional equity financing, debt financing or
other sources, may not be available when needed or may result in significant
dilution to existing stockholders. The inability to obtain sufficient funds from
operations or external sources would have a material adverse effect on the
Company's business, results of operations and financial condition. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
 
NO SPECIFIC USE OF PROCEEDS
 
     The Company has not designated any specific use for the net proceeds from
the Offering of the 2,600,000 shares of Common Stock. Rather, the Company
intends to use the net proceeds primarily for sales and marketing, research and
development, working capital and other general corporate purposes, which may
include acquisitions and strategic investments. Accordingly, management will
have significant flexibility in applying the net proceeds of the Offering. See
"Use of Proceeds."
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of the Common Stock offered
hereby, at an assumed initial public offering price of $11.00 per share and
after deducting estimated underwriting discounts and commissions and offering
expenses, are estimated to be approximately $25.9 million (approximately $29.9
million if the Underwriters' over-allotment option is exercised in full). The
net proceeds from the Offering will be utilized for sales and marketing,
research and development, working capital and other general corporate purposes.
See "Risk Factors -- No Specific Use of Proceeds." From time to time, in the
ordinary course of business, the Company evaluates possible acquisitions of or
investments in businesses, products and technologies that are complementary to
those of the Company. A portion of the net proceeds may therefore be used to
fund acquisitions or investments. The Company currently has no arrangements,
agreements or understandings, and is not engaged in active negotiations, with
respect to any such acquisition or investment.
 
     Pending the application of the net proceeds from the Offering, the Company
intends to invest the net proceeds in short-term, investment-grade,
interest-bearing instruments or money market funds. To the extent necessary to
avoid being subject to the registration requirements of the Investment Company
Act of 1940, as amended, the Company would invest the balance in U.S. Treasury
obligations. Returns on such investments may be less than those that might
otherwise result if the Company were able to use such funds immediately in its
operations.
 
                                DIVIDEND POLICY
 
     The Company has never declared or paid any dividends on its Common Stock.
The Company does not anticipate paying any dividends on the Common Stock in the
foreseeable future and intends to retain all available funds for use in the
operation and development of its business. The Board of Directors intends to
review the Company's dividend policy from time to time. Any payment of dividends
in the future will be at the discretion of the Board of Directors and will be
dependent on the earnings and financial requirements of the Company and other
factors, including restrictions imposed by the Delaware GCL on the payment of
dividends, covenants restricting the payment of dividends in future loan
documents and such other factors as the Board of Directors deems relevant.
 
                                       16
<PAGE>   19
 
                                    DILUTION
 
     The pro forma net tangible book value of the Company at March 31,1996 was
$18.0 million or $1.85 per share. Pro forma net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of shares of Common Stock
outstanding on a pro forma basis, after giving effect to (i) the sale of certain
shares of Series E Preferred Stock and shares of Series F Preferred Stock
subsequent to March 31, 1996 and (ii) the automatic conversion of all
outstanding shares of the Company's Preferred Stock into Common Stock upon the
consummation of the Offering, but without giving effect to the acquisition of
the rock website, Rocktropolis. Without giving effect to any changes in pro
forma net tangible book value after March 31, 1996, other than to give effect to
the sale of the Common Stock offered hereby at an assumed public offering price
of $11.00 per share and after deducting estimated underwriting discounts and
commissions and offering expenses, the Company's adjusted pro forma net tangible
book value as of March 31, 1996 would have been $43.9 million or $3.55 per share
representing an immediate increase in net tangible book value of $1.70 per share
to the existing stockholders and an immediate dilution to new investors of $7.45
per share. The following table illustrates the dilution to new investors:
 
<TABLE>
    <S>                                                                     <C>     <C>
    Assumed initial public offering price per share.......................          $11.00
      Pro forma net tangible book value per share before the Offering.....  $1.85
      Net increase in pro forma net tangible book value per share
         attributable to the Offering.....................................   1.70
                                                                            -----
    Pro forma net tangible book value per share after the Offering........            3.55
                                                                                    ------
    Dilution per share to new investors in the Offering(1)................          $ 7.45
                                                                                    ======
</TABLE>
 
- ------------------------------
 
(1) Based on the assumptions set forth above, the dilution to new investors
     would be $7.56 per share if all outstanding warrants and options to
     purchase shares of Common Stock were exercised in full at a weighted
     average exercise price of $2.74 per share of Common Stock.
 
     The following table summarizes, on a pro forma basis (as described above)
as of March 31, 1996, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by the existing stockholders and by the new investors purchasing
shares of Common Stock in the Offering, at an assumed initial public offering
price of $11.00 per share and before deducting estimated underwriting discounts
and commissions and offering expenses:
 
<TABLE>
<CAPTION>
                                            SHARES PURCHASED       TOTAL CONSIDERATION      AVERAGE
                                          --------------------    ---------------------      PRICE
                                            NUMBER     PERCENT      AMOUNT      PERCENT    PER SHARE
                                          ----------   -------    -----------   -------    ---------
    <S>                                   <C>          <C>        <C>           <C>        <C>
    Existing stockholders...............   9,761,989      79.0%   $32,647,414      53.3%     $3.34
    New investors.......................   2,600,000      21.0     28,600,000      46.7      11.00
                                          ----------   -------    -----------   -------
              Total.....................  12,361,989     100.0%   $61,247,414     100.0%
                                           =========    ======     ==========    ======
</TABLE>
 
     The above tables excludes (i) 59,722 shares issued on June 21, 1996 in
connection with the purchase of the rock website, Rocktropolis, (ii) 1,880,952
shares of Common Stock issuable upon exercise of outstanding stock options,
(iii) 2,571,403 shares of Common Stock reserved for future grants under the
Company's stock option and purchase plans and (iv) 135,555 shares of Common
Stock reserved for issuance pursuant to the exercise of outstanding warrants.
The weighted average exercise price of all outstanding options and warrants is
$2.74 per share. See "Management -- Stock Plans," "Description of Capital Stock"
and Note 5 of Notes to Consolidated Financial Statements.
 
                                       17
<PAGE>   20
 
                                 CAPITALIZATION
 
     The following table sets forth (i) the capitalization of the Company as of
March 31, 1996, (ii) the pro forma capitalization of the Company as of such date
giving effect to (a) the sale of certain shares of Series E Preferred Stock and
shares of Series F Preferred Stock subsequent to March 31, 1996 and (b) the
automatic conversion of all outstanding shares of the Company's Preferred Stock
into Common Stock upon the consummation of the Offering but without giving
effect to the purchase of the rock website, Rocktropolis, and (iii) the pro
forma capitalization of the Company as adjusted to give effect to the sale of
the Common Stock offered hereby at an assumed initial public offering price of
$11.00 per share and after deducting estimated underwriting discounts and
commissions and offering expenses. This table should be read in conjunction with
the Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Prospectus. See "Description of Capital Stock."
 
<TABLE>
<CAPTION>
                                                                     MARCH 31, 1996
                                                       ------------------------------------------
                                                          ACTUAL       PRO FORMA     AS ADJUSTED
                                                       ------------   ------------   ------------
<S>                                                    <C>            <C>            <C>
Stockholders' equity:
  Preferred stock, $0.001 par value; 20,000,000
     shares authorized, 9,154,555 shares issued and
     outstanding, actual; none issued and
     outstanding, pro forma and as adjusted..........  $      9,155   $         --   $         --
  Common stock, $0.001 par value; 100,000,000 shares
     authorized; 3,886,548 shares issued and
     outstanding, actual; 9,761,989 shares issued and
     outstanding, pro forma; and 12,361,989 shares
     issued and outstanding, as adjusted(1)..........         3,887          9,762         12,362
  Additional paid-in capital.........................    15,683,925     31,587,205     57,482,605
  Accumulated deficit................................   (13,280,629)   (13,280,629)   (13,280,629)
                                                       ------------   ------------   ------------
     Total stockholders' equity......................     2,416,338     18,316,338     44,214,338
                                                       ------------   ------------   ------------
          Total capitalization.......................  $  2,416,338   $ 18,316,338   $ 44,214,338
                                                        ===========    ===========    ===========
</TABLE>
 
- ------------------------------
 
(1) Excludes (i) 59,722 shares issued on June 21, 1996 in connection with the
     purchase of the rock website, Rocktropolis, (ii) 1,880,952 shares of Common
     Stock issuable upon exercise of outstanding stock options, (iii) 2,571,403
     shares of Common Stock reserved for future grants under the Company's stock
     option and purchase plans and (iv) 135,555 shares of Common Stock reserved
     for issuance pursuant to the exercise of outstanding warrants. The weighted
     average exercise price of all outstanding options and warrants is $2.74 per
     share. See "Management -- Stock Plans," "Description of Capital Stock" and
     Note 5 of Notes to Consolidated Financial Statements.
 
                                       18
<PAGE>   21
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The selected consolidated financial data set forth below as of and for the
years ended December 31, 1991, 1992, 1993, 1994 and 1995 and for the three
months ended March 31, 1996, have been derived from the Company's financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The consolidated financial statements of the Company for each of
the three years in the period ended December 31, 1995 and the three months ended
March 31, 1996 and the related balance sheets at December 31, 1994 and 1995 and
March 31, 1996, which have been audited by Arthur Andersen LLP, have been
included elsewhere in this Prospectus. The selected statement of operations data
for the three months ended March 31, 1995 have been derived from unaudited
financial statements of the Company that, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial condition and results of operations for
this interim period. The results of operations for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year. The selected consolidated
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                                          THREE MONTHS ENDED
                                                       YEAR ENDED DECEMBER 31,                                MARCH 31,
                                  ------------------------------------------------------------------   ------------------------
                                     1991         1992          1993          1994          1995          1995         1996
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
<S>                               <C>          <C>           <C>           <C>           <C>           <C>          <C>
STATEMENT OF OPERATIONS DATA:
  Revenues:
    Entertainment...............  $   --       $   --        $   --        $   --        $    96,505   $   --       $   216,800
    Information services........   8,924,784     8,248,631    10,360,257    11,391,780    10,976,711    3,204,151     2,514,382
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
                                   8,924,784     8,248,631    10,360,257    11,391,780    11,073,216    3,204,151     2,731,182
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
  Cost of revenues:
    Entertainment...............      --           --            --            --             85,176       --           213,003
    Information services........   4,050,474     4,729,420     5,747,293     6,558,541     6,489,472    1,863,647     1,591,641
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
                                   4,050,474     4,729,420     5,747,293     6,558,541     6,574,648    1,863,647     1,804,644
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
      Gross profit..............   4,874,310     3,519,211     4,612,964     4,833,239     4,498,568    1,340,504       926,538
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
  Operating expenses:
    Operating and
      development(1)............   1,821,417     1,553,216     1,350,057     1,777,654     2,267,852      536,721     1,247,573
    Sales and marketing.........   1,517,195     1,380,892     1,213,829     1,364,198     2,575,618      501,172       430,993
    General and
      administrative............   1,529,451     1,777,701     1,471,150     1,564,658     1,337,731      343,241       507,255
    Charge for purchased
      research and
      development(2)............      --           --            --            --            --            --         4,133,281
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
      Operating income (loss)...       6,247    (1,192,598)      577,928       126,729    (1,682,633)     (40,630)   (5,392,564)
  Interest income...............     101,959        65,658        43,761        73,359       106,370       27,683        24,904
  Interest expense..............     (74,893)     (105,658)      (82,890)      (48,398)      (18,237)      (3,544)      (16,552)
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
      Income (loss) before
        income taxes............      33,313    (1,232,598)      538,799       151,690    (1,594,500)     (16,491)   (5,384,212)
  Income taxes..................      --           --             33,913         9,280           300          663       --
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
  Net income (loss).............  $   33,313   $(1,232,598)  $   504,886   $   142,410   $(1,594,800)  $  (17,154)  $(5,384,212)
                                   =========    ==========    ==========    ==========    ==========    =========    ==========
  Pro forma net loss per common
    share(3)....................                                                         $     (0.15)               $     (0.49)
                                                                                          ==========                 ==========
  Shares used in computing pro
    forma net loss per common
    share(3)....................                                                          10,939,989                 10,925,422
                                                                                          ==========                 ==========
</TABLE>
 
                                       19
<PAGE>   22
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,                                 MARCH 31, 1996
                                      --------------------------------------------------------------   -------------------------
                                         1991         1992         1993         1994         1995        ACTUAL     PRO FORMA(4)
                                      ----------   ----------   ----------   ----------   ----------   ----------   ------------
<S>                                   <C>          <C>          <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
  Working capital (deficit).........  $  640,704   $ (263,801)  $  171,779   $1,812,216   $   20,200   $1,070,133   $16,970,133
  Total assets......................   4,245,506    3,592,953    3,909,098    4,776,923    3,658,660    5,806,745    21,706,745
  Long-term debt, excluding current
    portion.........................     225,000       75,000           --           --           --           --            --
  Stockholders' equity..............   1,262,842       37,244      542,130    2,243,704      648,984    2,416,338    18,316,338
</TABLE>
 
- ------------------------------
 
(1) For the year ended December 31, 1995 and the three months ended March 31,
     1995 and 1996, the Company incurred costs of $1.3 million, $286,000 and
     $496,000 relating to research and development. These amounts are included
     in operating and development expenses. For the periods prior to 1995, the
     Company did not separately identify research and development costs.
 
(2) On February 13, 1996, New York N2K, which was founded in 1995 as a developer
     of online music entertainment content, was merged with and into Telebase, a
     Pennsylvania corporation formed in 1984 as a provider of online information
     services. In connection with the Merger, the Company incurred a one-time
     charge for purchased research and development. See Notes 1 and 2 of Notes
     to Consolidated Financial Statements.
 
(3) Reflects the conversion of all outstanding shares of the Company's Preferred
     Stock into Common Stock upon the consummation of the Offering. See Note 1
     of Notes to Consolidated Financial Statements. If the Merger had occurred
     on January 1, 1995, the pro forma results would have been as follows:
 
<TABLE>
<CAPTION>
                                                                               THREE MONTHS
                                                           YEAR ENDED             ENDED
                                                        DECEMBER 31, 1995     MARCH 31, 1996
                                                        -----------------     --------------
        <S>                                             <C>                   <C>
        Unaudited pro forma revenues..................     $11,216,842         $  2,799,809
                                                         =============          ===========
        Unaudited pro forma net loss..................     $(2,839,579)        $ (1,634,819)
                                                         =============          ===========
        Unaudited pro forma net loss per Common
          Share.......................................     $     (0.26)        $      (0.15)
                                                         =============          ===========
</TABLE>
 
    The above pro forma information for both periods excludes the one-time
    charge of $4.1 million associated with the write-off of purchased research
    and development.
 
(4) Reflects (i) the sale of certain shares of Series E Preferred Stock and
     shares of Series F Preferred Stock subsequent to March 31, 1996, and (ii)
     the automatic conversion of all outstanding shares of the Company's
     Preferred Stock into Common Stock upon consummation of the Offering.
 
                                       20
<PAGE>   23
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     N2K is a music entertainment company focused on providing original content,
interactive programming and recorded music using the Internet as a new global
marketing, promotion and distribution medium. By combining its music industry
and technical expertise, N2K has created an interactive, entertaining and
content-rich online environment, which includes its award-winning merchandising
website, Music Boulevard, music genre websites, Jazz Central Station and
Rocktropolis, and individual artist websites for such artists as David Bowie and
The Rolling Stones. In February 1996, N2K Inc., which was founded in 1995 as a
developer of online music entertainment content was merged with Telebase, which
was founded in 1984 as a provider of online information services. In 1995,
recognizing increasing opportunities in the consumer entertainment market,
Telebase expanded its online strategy to include music entertainment and began
expending significant resources to enter this market.
 
     The Company launched its first Internet website, Music Boulevard, in August
1995, and introduced its first music genre website, Jazz Central Station, in
January 1996. The Company's revenues from its online music entertainment
business have grown from approximately $85,000 for the three months ended
December 31, 1995 to approximately $217,000 for the three months ended March 31,
1996. To date, the primary source of entertainment revenues has been the sale of
CDs and cassettes produced by others. Margins on such sales are impacted by
payments to a third party for fulfillment of customer orders, telecommunications
and credit card processing charges. Margins have also been impacted on a
historical basis due to customer subscription programs, which have now been
discontinued. In the future, the Company expects to also generate music
entertainment revenues from the sale of N2K Encoded Music CDs, the sale of
advertising on its websites and the sale of music-related merchandise, which the
Company believes will contribute to higher margins. The Company believes that
its future financial performance will be determined in large part by its success
in selling recorded music under its planned label, and by selling advertising
space on its websites.
 
     Historically, substantially all of the Company's revenues have been
generated through the sale of online information services. The Company's
principal information service is EasyNet, a premium-priced general reference
retrieval service licensed to online content distributors, primarily CompuServe
and NIFTY. The online information services business has been undergoing a
transition as more reference content has become directly available to consumers
on the Internet at minimal or no cost, thus competing with established online
services such as CompuServe. In response to this transition, the Company
unbundled its EasyNet services on CompuServe beginning in June 1995 and lowered
its prices, thereby significantly reducing the Company's revenues. The Company
has re-focused its information services on premium-priced databases serving
specific business needs, such as business credit and intellectual property, for
which the Company believes the market is less price sensitive than for general
reference databases. In addition, the Company has recently introduced desktop
software providing customized database services focused on the specialized needs
of the SOHO market. The Company markets these services through Knight-Ridder
(Custom DIALOG and DIALOG Quickstarts) and plans to market these services
through other large publishers in the future. See "Business -- N2K Information
Services." The Company generates information services revenues through
transactional charges to the distributors for their customers' use of the
service and royalty fees for use of the Company's desktop software.
 
     The Company believes that its experience in developing and providing
information services is critical to its ability to develop its online music
entertainment business. To date, however, the Company has only a limited
operating history in its entertainment business upon which an evaluation of N2K
and its prospects can be based. Accordingly, N2K believes that the results of
its operations for the past five years, during which time the Company had almost
no online music entertainment revenues, are not meaningful indications of future
performance. See "Risk Factors -- History of Losses; Uncertainty of Future
Results" and "Risk Factors -- Management of Growth; Changing Business Focus;
Acquisitions."
 
                                       21
<PAGE>   24
 
     On February 13, 1996, New York N2K, which was founded in 1995 as a
developer of online music entertainment content, was merged with and into
Telebase, a provider of online information services. Pursuant to the Merger, the
stockholders of New York N2K received shares of Common Stock and shares of
Series E Preferred Stock. The Merger was accounted for as a purchase transaction
with a total purchase price, including transaction costs, of approximately $4.4
million. In connection with the Merger, $4.1 million was charged to expense as
of the date of the transaction as a one-time charge to record the write-off of
purchased research and development. The Company also recorded goodwill of
$280,000 that is being amortized over five years on a straight-line basis. The
results of the acquired business and the shares issued in connection with the
transaction have been included in the Company's financial statements since
February 13, 1996.
 
     On June 21, 1996, the Company acquired the rock website, Rocktropolis, from
Rocktropolis Enterprises, LLC, for $633,000 in cash and 59,722 shares of Common
Stock. The acquisition will be accounted for as a purchase. The Company will
charge to expense as of the date of the acquisition a significant portion of the
purchase price as a one-time charge to record the write-off of purchased
research and development. Such charge to expense will be recorded in the quarter
ending June 30, 1996.
 
QUARTERLY RESULTS
 
     The following table sets forth certain financial information for each of
the Company's last five quarters. This unaudited quarterly information has been
prepared on the same basis as the audited financial statements presented
elsewhere in this Prospectus and, in the opinion of the Company's management,
reflects all adjustments (consisting only of normal, recurring adjustments)
necessary for a fair presentation of the information for the periods covered.
The table should be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period.
 
<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                     --------------------------------------------------------------------
                                     MARCH 31,     JUNE 30,    SEPTEMBER 30,   DECEMBER 31,    MARCH 31,
                                        1995         1995          1995            1995          1996
                                     ----------   ----------   -------------   ------------   -----------
<S>                                  <C>          <C>          <C>             <C>            <C>
Revenues:
  Entertainment....................  $       --   $       --    $    11,602     $   84,903    $   216,800
  Information services.............   3,204,151    2,795,913      2,587,936      2,388,711      2,514,382
                                     ----------   ----------   -------------   ------------   -----------
                                      3,204,151    2,795,913      2,599,538      2,473,614      2,731,182
                                     ----------   ----------   -------------   ------------   -----------
Cost of revenues:
  Entertainment....................          --           --         11,187         73,989        213,003
  Information services.............   1,863,647    1,638,363      1,542,791      1,444,671      1,591,641
                                     ----------   ----------   -------------   ------------   -----------
                                      1,863,647    1,638,363      1,553,978      1,518,660      1,804,644
                                     ----------   ----------   -------------   ------------   -----------
     Gross profit..................   1,340,504    1,157,550      1,045,560        954,954        926,538
                                     ----------   ----------   -------------   ------------   -----------
Operating expenses:
  Operating and development........     536,721      594,196        580,269        556,666      1,247,573
  Sales and marketing..............     501,172      577,642        658,054        838,750        430,993
  General and administrative.......     343,241      344,364        342,397        307,729        507,255
  Charge for purchased research and
     development...................      --           --            --             --           4,133,281
                                     ----------   ----------   -------------   ------------   -----------
     Operating income (loss).......     (40,630)    (358,652)      (535,160)      (748,191)    (5,392,564)
Interest income/expense (net)......      24,139       26,768         23,277         13,949          8,352
                                     ----------   ----------   -------------   ------------   -----------
     Income (loss) before income
       taxes.......................     (16,491)    (331,884)      (511,883)      (734,242)    (5,384,212)
Income taxes.......................         663          225            504         (1,092)            --
                                     ----------   ----------   -------------   ------------   -----------
Net income (loss)..................  $  (17,154)  $ (332,109)   $  (512,387)    $ (733,150)   $(5,384,212)
                                      =========    =========     ==========     ==========     ==========
</TABLE>
 
                                       22
<PAGE>   25
 
     In August 1995, the Company launched its first Internet website, Music
Boulevard, and introduced Jazz Central Station, its first music genre website,
in January 1996. The Company's sales relating to its entertainment services,
which have been primarily from the sale of CDs and cassettes produced by others,
have grown from $85,000 for the three months ended December 31, 1995 to $217,000
for the three months ended March 31, 1996. Revenues for information services
declined each quarter in 1995, reflecting a less favorable environment for
commercial information services and the Company's decision to unbundle its
premium-priced services on CompuServe beginning in June 1995. CompuServe
accounted for approximately 76.3% of the Company's revenues in 1995. See "Risk
Factors -- Dependence on Key Customers."
 
     The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including demand
for the Company's services, the timing of the introduction or enhancement of
websites and services by the Company and its competitors, market acceptance of
new services, the mix of services sold, seasonality of the information retrieval
services markets and recorded music industry, seasonality in recorded music
advertising sales, the timing of new releases by the Company's planned record
label, technical difficulties and system downtime and general economic
conditions. In addition, the Company only recently entered the music
entertainment business, the Company anticipates that revenues from its music
entertainment business will track traditional consumer buying habits. Therefore,
music revenues are expected to decline during the summer months of the second
and third quarters and to increase during the late fourth-quarter peak holiday
season. As a result, the Company believes that period-to-period comparisons of
its results of operations are not and will not necessarily be meaningful and
should not be relied upon as an indication of future performance. See "Risk
Factors -- Potential Fluctuations in Quarterly Results; Seasonality."
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, certain items
derived from the Company's statements of operations as a percentage of revenues.
 
<TABLE>
<CAPTION>
                                                                                    THREE MONTHS
                                                                                        ENDED
                                                        YEAR ENDED DECEMBER 31,       MARCH 31,
                                                        -----------------------    ---------------
                                                        1993     1994     1995     1995      1996
                                                        -----    -----    -----    -----    ------
<S>                                                     <C>      <C>      <C>      <C>      <C>
Revenues:
  Entertainment.......................................     --%      --%     0.9%      --%      7.9%
  Information services................................  100.0    100.0     99.1    100.0      92.1
                                                        -----    -----    -----    -----    ------
                                                        100.0    100.0    100.0    100.0     100.0
                                                        -----    -----    -----    -----    ------
Cost of revenues:
  Entertainment.......................................     --       --      0.8       --       7.8
  Information services................................   55.5     57.6     58.6     58.2      58.3
                                                        -----    -----    -----    -----    ------
                                                         55.5     57.6     59.4     58.2      66.1
                                                        -----    -----    -----    -----    ------
     Gross profit.....................................   44.5     42.4     40.6     41.8      33.9
                                                        -----    -----    -----    -----    ------
Operating expenses:
  Operating and development...........................   13.0     15.6     20.5     16.8      45.7
  Sales and marketing.................................   11.7     12.0     23.2     15.6      15.7
  General and administrative..........................   14.2     13.7     12.1     10.7      18.6
  Charge for purchased research and development.......     --       --       --       --     151.3
                                                        -----    -----    -----    -----    ------
     Operating income (loss)..........................    5.6      1.1    (15.2)    (1.3)   (197.4)
Interest income.......................................    0.4      0.6      1.0      0.9       0.9
Interest expense......................................   (0.8)    (0.4)    (0.2)    (0.1)     (0.6)
                                                        -----    -----    -----    -----    ------
     Income (loss) before income taxes................    5.2      1.3    (14.4)    (0.5)   (197.1)
Income taxes..........................................    0.3       --       --       --        --
                                                        -----    -----    -----    -----    ------
Net income (loss).....................................    4.9      1.3    (14.4)    (0.5)   (197.1)
                                                        =====    =====    =====    =====    ======
</TABLE>
 
                                       23
<PAGE>   26
 
  Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995
 
     Revenues.  Entertainment revenues for the three months ended March 31, 1996
totaled $217,000. The Company had no entertainment revenues for the three months
ended March 31, 1995. Information services revenues declined 21.5% from $3.2
million for the three months ended March 31, 1995 to $2.5 million for the three
months ended March 31, 1996 due primarily to the Company's unbundling of its
premium-priced services and lowering of prices on CompuServe in June 1995 and
lower volume. CompuServe and NIFTY accounted for approximately 68.9% and 11.0%,
respectively, of revenues for the three months ended March 31, 1996. See "Risk
Factors -- Dependence on Key Customers."
 
     Cost of Revenues.  Cost of revenues for entertainment totaled $213,000
(98.2% of entertainment revenues) for the three months ended March 31, 1996.
Cost of revenues for entertainment consists of payments to a third-party
fulfillment operation for the shipment to the Company's customers of music CDs
and cassettes produced by others, telecommunications and credit card processing
charges and costs associated with customer subscription programs, which programs
have been discontinued.
 
     Cost of revenues for information services declined 14.6% from $1.9 million
for the three months ended March 31, 1995 (58.2% of information services
revenues) to $1.6 million for the three months ended March 31, 1996 (63.3% of
information services revenues). Cost of revenues for information services
consists primarily of payments to information providers for content used in the
Company's information services and payments to telecommunications carriers. Cost
of revenues for information services as a percentage of information services
revenues increased reflecting decreased prices related to the Company's decision
to unbundle premium-priced services offered on CompuServe beginning in June
1995.
 
     Operating and Development Expenses.  Operating and development expenses
increased 132.4% from $537,000 for the three months ended March 31, 1995 (16.8%
of total revenues) to $1.2 million for the three months ended March 31, 1996
(45.7% of total revenues), due to increased staffing resulting from the Merger
and a reorganization of resources within the Company to increase development of
music websites. Operating and development expenses consist primarily of software
engineering, multimedia production, graphic design and computer operations used
in the development, operation and maintenance of the Company's services.
 
     Sales and Marketing Expenses.  Sales and marketing expenses declined 14.0%
from $501,000 for the three months ended March 31, 1995 (15.6% of total
revenues) to $431,000 for the three months ended March 31, 1996 (15.7% of total
revenues) due to the reorganization of resources within the Company to increase
development of music websites and to delays in filling vacant positions in sales
and marketing. The Company expects that levels of sales and marketing
expenditures will significantly increase in future periods.
 
     General and Administrative Expenses.  General and administrative expenses
increased 47.8% from $343,000 for the three months ended March 31, 1995 (10.7%
of total revenues) to $507,255 for the three months ended March 31, 1996 (18.6%
of total revenues) due to the addition of personnel as a result of the Merger.
 
     The Company incurred a one-time charge in 1996 of $4.1 million to record
the write-off of purchased research and development resulting from the Merger.
The amount represented the estimated fair values related to incomplete research
and development projects that were acquired as determined by independent
appraisals. The technology acquired will require substantial additional
development by the Company. On June 21, 1996 the Company acquired the rock
website, Rocktropolis. The acquisition will be accounted for as a purchase. The
Company will charge to expense as of the date of the acquisition a significant
portion of the purchase price as a one-time charge to record the write-off of
purchased research and development. Such charge to expense will be recorded in
the quarter ending June 30, 1996.
 
     Interest income and expense consist of interest income on short-term liquid
investments of the Company's excess cash and interest expense incurred by the
financing of equipment through capital leases and the use of the Company's
revolving credit line. There was no significant change in interest income from
1995 to 1996. Interest expense increased due to the addition of capital leases
from the Merger and the use of the Company's revolving credit line in 1996 to
fund working capital.
 
                                       24
<PAGE>   27
 
  Fiscal 1995 Compared with Fiscal 1994
 
     Revenues.  Entertainment revenues for 1995 totaled $97,000, reflecting the
Company's launch of its entertainment services in August 1995. The Company had
no entertainment revenues prior to 1995. Information services revenues declined
3.6% from $11.4 million in 1994 to $11.0 million in 1995, primarily due to a
decline in revenues from one distributor that no longer accounts for a
significant portion of the Company's information services revenues. In 1995, the
Company reduced prices as it unbundled its premium-priced services on CompuServe
in June 1995. CompuServe and NIFTY accounted for 76.3% and 10.5%, respectively,
of information services revenues in 1995.
 
     Cost of Revenues.  Cost of revenues for entertainment totaled $85,000 in
1995 (88.3% of entertainment revenues, reflecting primarily payments to a
third-party fulfillment operation for the shipment to the Company's customers of
music CDs and cassettes produced by others and telecommunications and credit
card processing charges. Cost of revenues for information services declined 1.1%
from $6.6 million in 1994 (57.6% of information services revenues) to $6.5
million in 1995 (59.1% of information services revenues). The increase in cost
of information services revenues as a percentage of information services
revenues reflects the Company's strategic decision to reduce margins for
competitive reasons.
 
     Operating and Development Expenses.  Operating and development expenses
increased 27.6% from $1.8 million in 1994 (15.6% of total revenues) to $2.3
million in 1995 (20.5% of total revenues). The increase reflects the expansion
of the Company's engineering staff and the development and launch of Music
Boulevard.
 
     Sales and Marketing Expenses.  Sales and marketing expenses increased 88.9%
from $1.4 million in 1994 (12.0% of total revenues) to $2.6 million in 1995
(23.2% of total revenues). The Company sells its information services products
through distributors that bear the majority of the marketing expenses to reach
customers. In its entertainment business, the Company incurs the expenses of
marketing directly to its customers, and the increase in sales and marketing
expenses reflects primarily costs associated with the launch of Music Boulevard.
 
     General and Administrative Expenses.  General and administrative expenses
declined 14.5% from $1.6 million in 1994 (13.7% of revenues) to $1.3 million in
1995 (12.1% of revenues). The decline reflects the Company's efforts to reduce
general and administrative expenses in order to provide additional funds for its
research and development activities.
 
  Fiscal 1994 Compared with Fiscal 1993
 
     Revenues.  Information services revenues increased 10.0% from $10.4 million
in 1993 to $11.4 million in 1994, primarily due to growth of the Company's two
largest distributors, CompuServe and NIFTY, which accounted for 74.5% and 9.6%,
respectively, of revenues in 1994.
 
     Cost of Revenues.  Cost of revenues for information services increased
14.1% from $5.7 million in 1993 (55.5% of information services revenues) to $6.6
million in 1994 (57.6% of information services revenues). The increase in cost
of information services revenues was due primarily to price increases from
information providers that the Company did not pass on to its customers.
 
     Operating and Development Expenses.  Operating and development expenses
increased 31.7% from $1.4 million in 1993 (13.0% of total revenues) to $1.8
million in 1994 (15.6% of total revenues). The increase reflects the expansion
of the Company's engineering staff.
 
     Sales and Marketing Expenses.  Sales and marketing expenses increased 12.4%
from $1.2 million in 1993 (11.7% of total revenues) to $1.4 million in 1994
(12.0% of total revenues), due to increased spending to market services on
CompuServe through print advertising.
 
     General and Administrative Expenses.  General and administrative expenses
increased 6.4% from $1.5 million in 1993 (14.2% of revenues) to $1.6 million in
1994 (13.7% of revenues).
 
                                       25
<PAGE>   28
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company has financed its operations and capital expenditures primarily
from equity financings, cash generated from operations, lease financings and a
revolving bank credit line described herein. At March 31, 1996, the Company had
a cash balance of $1.5 million. Subsequent to March 31, 1996, the Company had
raised net proceeds of $15.9 million through the private placement of Preferred
Stock to fund the future growth of its business. Cash on hand plus the proceeds
of the Offering are expected to provide the funds needed to finance the
Company's planned operations and capital expenditures for at least the next two
years. The Company expects negative cash flow from operations to continue for
the foreseeable future, as it continues to develop and market its online
entertainment operations. See "Risk Factors -- History of Losses; Uncertainty of
Future Results," "-- Possible Need for Additional Funds" and "Use of Proceeds."
 
     The Company has a commitment for a $1.0 million revolving line of credit
with CoreStates Bank, N.A. (the "CoreStates Facility"), which will expire on
June 30, 1996. The CoreStates Facility bears interest at the prime rate for
borrowings which do not exceed $500,000 and at the prime rate plus 1% for
borrowings which exceed $500,000 and is secured by a security interest in
substantially all of the Company's assets. Maximum borrowings under the
CoreStates Facility are limited to certain percentages of eligible accounts
receivable. The CoreStates Facility is subject to an unused commitment fee in
the amount of 0.5% of the unused portion of the facility on a quarterly basis.
The Company is negotiating an extension of the CoreStates Facility.
 
     From time to time, in the ordinary course of business, the Company
evaluates possible acquisitions of or investments in businesses, products and
technologies that are complementary to those of the Company. A portion of the
Company's cash resources may therefore be used to fund acquisitions or
investments. The Company currently has no arrangements, agreements or
understandings, and is not engaged in active negotiations, with respect to any
such acquisition or investment. See "Risk Factors -- Management of Growth;
Changing Business Focus; Acquisitions."
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. This statement
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company is required to adopt
SFAS 123 effective January 1, 1996. The Company has elected to adopt the
disclosure requirement of this pronouncement. The adoption of this pronouncement
is expected to have no impact on the Company's financial position or results of
operations.
 
                                       26
<PAGE>   29
 
                                    BUSINESS
 
THE COMPANY
 
     N2K is a music entertainment company focused on providing original content,
interactive programming and recorded music using the Internet as a new global
marketing, promotion and distribution medium. By combining its music industry
and technical expertise, N2K has created an interactive, entertaining and
content-rich online environment, which includes its award-winning merchandising
website, Music Boulevard (WWW.MUSICBLVD.COM), music genre websites, Jazz Central
Station (WWW.JAZZCENTRALSTATION.COM) and Rocktropolis (WWW.ROCKTROPOLIS.COM),
and individual artist websites for such artists as David Bowie
(WWW.DAVIDBOWIE.COM) and the Rolling Stones (WWW.STONESWORLD.COM). See
"-- Entertainment Products and Services -- Websites." These websites provide a
comprehensive entertainment and information resource enabling users to search
and sample music and artist information interactively through sound, video and
graphics. Each of the music genre and individual artist websites features a
hotlink directly with Music Boulevard to facilitate purchases of CDs, cassettes
and related merchandise. The Company plans to introduce its own recorded music
label, N2K Encoded Music, with its first release scheduled for October 1996. N2K
expects that all of its N2K Encoded Music CDs will be enhanced with multimedia
capabilities ("Enhanced CDs" or "E-CDs") and will be marketed and sold through
the Company's Internet websites as well as through traditional retail and other
distribution channels. The Company believes that its strategy of combining
Internet content, interactive sales and music produced on its own label will
enhance its ability to create compelling music brand names, address the broadest
possible music audience and build a customer base founded on targeted music
interests. The Company believes that its interactive sales channel will also
provide a new targeted advertising, promotion and distribution medium for the
music industry that will reach a global user base and that this medium will
shift the way music is marketed to consumers. See "-- The N2K Approach."
 
     Music Boulevard was launched in August 1995, and Jazz Central Station was
introduced in January 1996. Jazz Central Station is the official online website
for George Wein's Festival Productions, producer of the JVC Jazz Festivals, and
the Monterey Jazz Festival for 1996. On June 21, 1996, the Company acquired the
rock website, Rocktropolis, which was launched in June 1995 and which will be
integrated with the Company's existing websites. As part of its strategy to
provide locally tailored content, the Company's first foreign language site will
be launched in Japan in June 1996. Additional music genre sites are scheduled
for release in 1996 and 1997. See "-- Entertainment Products and
Services -- Planned Internet Sites." The Company's website strategy is to build
worldwide online communities around specific music genres where people may
socialize with each other and their favorite artists in a personal environment.
The Company believes that organizing its websites by genres, such as rock, jazz
and classical music, parallels traditional radio play formats and consumer
buying patterns and opens the interactive buying experience to the broadest
possible audience. In addition, the Company believes its genre websites provide
an attractive forum for the consumer to obtain information on specific artists,
and receive updates about related concert tours, music events and other
promotions. The Company believes that traffic flowing from the genre websites
may lead to increased traffic to Music Boulevard and a higher volume of
purchases. The Company's revenues from music entertainment have grown from
approximately $85,000 in the fourth quarter of 1995, to approximately $217,000
in the first quarter of 1996. Substantially all of these revenues were from the
sale of CDs and cassettes produced by other labels.
 
     The Company strengthened its music entertainment focus through the Merger
of New York N2K and Telebase completed in February 1996. However, to date,
substantially all of the Company's revenues have been derived from its online
information services. The Company believes that its ability to aggregate content
from a wide variety of sources, its database management skills and the
infrastructure provided by Telebase will enhance N2K's ability to scale the
infrastructure to facilitate the Company's growth and to create proprietary
databases for targeted marketing to music consumers. See "-- N2K Technology." In
addition, the Company continues to serve its information services customers and
is developing web-based software and information services for the business and
SOHO markets.
 
                                       27
<PAGE>   30
 
INDUSTRY OVERVIEW
 
  The Recorded Music Industry
 
     The recorded music industry represented approximately a $40 billion global
market in 1995, of which domestic sales accounted for approximately $12 billion.
Industry sources indicate that online sales of recorded music are expected to
exceed $30 million in 1996. The Company believes that online sales of recorded
music will complement the traditional retail channel and will expand overall
music sales due to the online medium's ability to capitalize on the ongoing
shift in demographics of music buyers, to effectively tap a growing
international consumer market and to offer the consumer easier access to a broad
range of titles.
 
     Historically, the development of technology has been one of the major
drivers of growth in the music industry. The introduction of the compact disc in
1983 has been a key factor in the industry's growth during the last decade as
consumers have replaced existing music collections with the CD format. Although
the rate of growth in unit sales of CDs in the U.S. market has lessened in the
1990s, the recorded music industry has continued to experience significant
growth due to expanding distribution, strong growth in the international markets
and shifting demographics. Stores other than record stores, tape and record
clubs and mail order facilities have become an important part of how recorded
music is distributed. For example, tape and record clubs and mail order
collectively comprised approximately 19% of domestic sales in 1994 versus
approximately 11% in 1990. These distribution channels have been particularly
successful in increasing music sales to older consumers who have become a more
important factor in overall music sales in recent years.
 
     The Company believes that the demographic profile of consumers of recorded
music has aged along with the population. According to the Recording Industry
Association of America (the "RIAA"), U.S. purchases of recorded music by the
over-30 age group have increased from approximately 37% of U.S. sales in 1985 to
approximately 47% of sales in 1994 representing total annual sales of
approximately $6 billion. The Company believes that the Internet represents an
attractive retail and promotion medium for customers in this age group because
they are less "hits driven" than younger age groups, typically can afford to buy
more titles at one time (reducing the per unit cost of shipping an electronic
order), often own personal computers and generally have credit cards which are
necessary to engage in electronic commerce.
 
     In addition, international markets for recorded music are growing faster
than the U.S. market. This growth is expected to continue as the music companies
expand their focus beyond English language popular music to local artists and as
television music channels proliferate and promotional tools expand
internationally. Due to the global network it provides, the Company believes the
Internet is well-positioned to tap into international consumer markets where
music sales are growing faster than in the U.S.
 
     In recent years, the music retailing industry has undergone major changes
as the industry has aggressively expanded the number of retail stores, including
megastores, on a national and international level, and as the retail music
environment has become more competitive with the expansion of new music
distribution channels. As a result, the Company believes that it is necessary to
reduce costs at the same time as the number of new releases which need to be
promoted and distributed has increased significantly. According to Soundscan,
Inc., a retail audio sales data collection company ("Soundscan"), the number of
new releases in 1995 was approximately 29,000 titles. Approximately 72% of unit
sales in 1995 came from approximately 2% of all titles available. Consequently,
many music retailers have focused on hit releases, which account for a high
percentage of a store's total sales but represent a small subset of generally
available titles. Retailers limit their overall inventory to match this hits
driven business model, making it increasingly difficult for consumers to get a
broad range of titles from the retail channel. For example, music stores stock
an average of approximately 10,000 SKUs and megastores stock an average of
approximately 35,000 SKUs of a total of approximately 145,000 SKUs generally
available in the U.S. In addition, the Company believes that the focus on hit
releases makes it more difficult for the industry to promote other titles cost
effectively. Today, new music releases are promoted through radio, print
advertising, music video and concert touring. These marketing efforts must cover
a great number of releases and compete for the attention of consumers. As a
result, exposing consumers to new artists and to a broad range of releases
creates a challenge for the record label companies.
 
                                       28
<PAGE>   31
 
     The Company believes that the Internet is emerging as an important
distribution channel for music retailing because of its ability to
cost-effectively promote, market and deliver an extended product line to a music
buying and listening audience that is highly segmented. This market segmentation
is reflected by the number and variety of radio play formats. In addition, there
are currently over 25 Billboard recorded music and airplay charts. The following
is a selection of the new music category charts added by Billboard magazine
since 1985:
 
                                   BILLBOARD
  ----------------------------------------------------------------------------
       CERTAIN NEW MAGAZINE CHART CATEGORIES ADDED SINCE JANUARY 1, 1985
 
                               Album Rock (1985)
                             Hot Dance Music (1985)
                              Latin Albums (1985)
                                Latin Pop (1985)
                         Latin Regional Mexican (1985)
                          Latin Tropical/Salsa (1985)
                           Classical Crossover (1986)
                              Latin Singles (1986)
                      Top Jazz Contemporary Albums (1987)
                           Modern Rock Tracks (1988)
                         Top New Age Jazz Albums (1988)
                             Hot Rap Singles (1989)
                         Hot World Music Albums (1990)
                            Top Reggae Albums (1994)
 
  The Internet
 
     The power, reach and use of the Internet and online services have grown
rapidly since the commercialization of the Internet in the early 1990s. Much of
the recent growth in Internet use has been driven by the emerging Web, a global
network of Internet servers. Growth in the number of Internet users has been
fueled by a number of factors, including the existing and increasing base of
personal computers ("PCs") in the workplace and at home, improvements in the
performance and speed and reduction in cost of PCs and modems, improvements in
network infrastructure, enhanced ease of access to the Web provided by Internet
service providers, consumer-oriented online services and long distance telephone
companies, emergence of standards for Internet navigation and information
access, declining costs of Internet service due to increased competition among
access providers and increased awareness of the Internet among businesses and
consumers. Growth in Internet consumer usage has also been fueled by the
emergence of the Web, which makes use of graphical user interface technology and
simplifies the retrieval and transmission of information.
 
     International Data Corporation has estimated that the Internet had
approximately 38 million users in 1995, and that this number will grow to
approximately 200 million users by 1999. Industry research, however, indicates
that consumer entertainment-driven use of the Internet is growing, and will
continue to grow at an even more dramatic rate. Further, the growth in access
providers internationally will drive additional traffic over the Internet.
 
     The Company believes that the emergence of the Internet as a mainstream
consumer medium is creating opportunities for entertainment companies to provide
programming for large numbers of consumers. Through the Web, entertainment
companies can deliver timely, personalized content in a manner not possible
through other media. Entertainment programming over the Internet can be
continuously updated, distributed to a vast number of users on a realtime basis,
and accessed by users at any time. The Internet offers an exciting medium for
music and music-related content because of the capacity for the combination of
graphic, audio and video elements. The interactive nature of the Web further
allows the consumer to access music and entertainment information tailored to
the individual user's preferences and system requirements and facilitates the
purchase of recorded music. The Company believes that growth opportunities in
music-related products and services will be driven by the ability to market to
defined user groups and distribute products directly to
 
                                       29
<PAGE>   32
 
these consumers. The Company believes that the Web will enable targeted
distribution, advertising and promotion, which can change the way products and
services are marketed to consumers. In addition, the ability to gather and
process data resulting from customer purchases and usage will facilitate
targeted promotional efforts in the highly segmented recorded music market.
 
THE N2K APPROACH
 
     The Company's objective is to build a dominant global music entertainment
company on the Internet. N2K's strategy is to offer engaging content,
interactive programming and recorded music to the consumer, and to provide a new
way for advertisers and merchants to reach targeted audiences, creating a new
channel through which music can be marketed, promoted and sold. Key elements of
the Company's strategy include:
 
     Build the N2K Brand Family.  The Company believes that Music Boulevard,
Jazz Central Station, Rocktropolis and its other planned websites will become
identified as brand names under the N2K umbrella, which will symbolize music
entertainment in the online digital age. The Company plans to build and expand
the N2K brand family by promoting its products and services through online
advertising in, and hotlinks with, record company websites, music artist
websites and online search directories such as Infoseek, Lycos, Netscape and
Yahoo! In addition, the Company seeks to create brand name recognition through
advertising and cross promotions in traditional channels such as retail music
stores, magazines and radio, endorsements by high profile music and online
industry participants, and promotion of the N2K brand family with organizations
and events that target the demographic profile of the N2K consumer. The Company
further believes that by continually expanding and developing the breadth, depth
and technological aspects of its websites and recorded music products, it will
be able to enhance its brand name franchise, sustain user growth, attract
advertisers and build its N2K Encoded Music label.
 
     Create Entertaining Buying Experience.  The Company creates content-rich
music genre sites, such as rock, jazz, classical, blues, country and urban,
through the combination of audio, graphics, text and video. The Company's genre
and artist websites allow users to target music and information based on
personal interests. The Company believes that this approach provides a
stimulating and entertaining online environment which establishes a community
atmosphere and promotes product sales principally through Music Boulevard. By
developing entertaining and informative content, and by providing a forum for
communication among online consumers, the Company's websites are designed to
motivate users to explore these music information resources, and to encourage
consumers to frequent a favorite website. A key characteristic of the Company's
websites is their dynamic and changing nature, which are designed to generate
immediacy and interest so that users want to return on a regular basis. The
Company believes that increased traffic on its websites will help to attract
additional advertising revenues.  See "-- Entertainment Products and
Services -- Websites."
 
     Create Own Record Label.  In addition to selling commercially available CDs
and cassettes and related music merchandise online, the Company considers the
launch of N2K Encoded Music to be a key part of its strategy to become a
dominant online music provider. The Company expects that all N2K Encoded Music
CDs will be enhanced with multimedia capabilities. The first releases under the
N2K Encoded Music label, scheduled for October 1996, are planned to be a
compilation of master recordings, based on a global poll of online users'
choices, licensed from other music labels and enhanced with video and graphics,
and a retrospective of Gerry Mulligan's recordings including two new recording
tracks. These and future recordings will be promoted through online promotional
and marketing events initiated by N2K with radio stations, concert promoters and
magazine publishers. In addition, the Company believes that it can leverage its
marketing and music industry expertise to sign artists to the N2K Encoded Music
label and promote and sell N2K Encoded Music Enhanced CDs through its online
interactive sales channel as well as through traditional retail and other
distribution channels. Beginning in the first calendar quarter of 1997, the
Company plans to release its first completely original artist recordings under
the N2K Encoded Music label. See "-- Entertainment Products and
Services -- Planned Record Label."
 
     Capitalize on Artist and Industry Relationships.  The Company believes that
the Internet offers a worldwide, direct one-on-one link between recording
artists and their music fans. Using the Internet, an artist can be showcased in
a unique multimedia environment, combining elements from radio, magazine,
newspaper,
 
                                       30
<PAGE>   33
 
video channels and in-store appearances. The Company's relationships with
recording artists and other key music industry personnel have allowed the
Company to build rich content on its genre-specific websites such as in-depth
areas on particular artists and hotlinks with specific artist websites. Music
Boulevard currently offers direct links with the David Bowie and Stones World
websites, while the Herbie Hancock, Chick Corea and Gerry Mulligan websites are
featured areas within Jazz Central Station. In addition, the Company has
established an advisory board for Jazz Central Station, through which it
maintains relationships with recording artists, music industry executives,
promoters, writers and educators to remain on the cusp of new industry trends
and developments and form new strategic partnerships through which to further
enhance and develop its websites. See "-- Entertainment Products and
Services -- Websites."
 
     Expand Global Reach.  The Company believes that music is a global product.
According to the International Federation of the Phonographic Industry,
worldwide music sales have increased by more than 300% over the last ten years.
The Company also believes that the Internet has few barriers to reaching a
worldwide audience and enables content providers to provide an alternative
information and entertainment medium for consumers, especially in countries
where the traditional information channels are highly regulated or controlled.
Use of the Internet is also increasing at a rapid pace, with approximately 200
million users estimated by 1999. Since the inception of its music entertainment
business, 35% of the Company's music product revenues have been to consumers in
over 60 countries outside the U.S. The Company also expects to enhance its
international presence with foreign language websites, the first of which will
be launched in Japan in June 1996.
 
     Leverage Technology.  The Company believes that it has sophisticated
systems and tools for delivering high-quality multimedia content and interactive
customer support. In addition, the Company plans to use its technical expertise
in its online information business to create proprietary music-oriented database
products. To maintain its systems, the Company intends to implement new industry
standards as they emerge and to support additional hardware and software
platforms as they are introduced and accepted. The Company further believes that
it has built its operations and infrastructure with the scalability necessary to
allow for and manage significant growth.
 
MUSIC ENTERTAINMENT ENVIRONMENT
 
     The Company believes that its online services and products provide the
following benefits to online music consumers as well as to industry participants
such as advertisers, record companies and recording artists:
 
  Benefits to Consumers
 
     Breadth and Depth of Content and Products.  The Company believes that its
users value the breadth and depth of its entertainment content, as well as its
music and music-related product offerings. By drawing the user into areas of
personal interest, the Company aims to drive sales deep into the catalog and
generate incremental sales by exposing the consumer to music for which his or
her knowledge or access may be limited in a traditional music store environment.
The Company believes that by providing information in an entertaining
programming format, consumers will be more likely to purchase music products.
The Company intends to enhance and expand its current content as well as to
develop and expand coverage to new areas. The Company will continue to seek
relationships with entities such as educational institutions, record labels,
instrument-specific magazines, foundations and international content providers
in order to offer what it considers to be the most comprehensive and highest
quality content to the global online music consumer. N2K currently offers its
consumers access to approximately 145,000 CD and cassette SKUs produced by
others (representing all of the approximately 110,000 titles currently
available) and approximately 50,000 samples of individual recordings, drawn from
approximately 16,000 albums. The Company's sound samples are offered in a MPEG
format. The Company continues to add new sound samples.
 
     Music Genre Approach.  The Company's website strategy is to build worldwide
online communities around specific genres of music where people may socialize
with each other and their favorite artists in a personal environment. The
Company believes that just as music is delivered through other channels like
radio stations, cable television channels such as MTV and special interest
magazines using a genre-specific format,
 
                                       31
<PAGE>   34
 
the online music fan will seek out music and product-related information
according to specific genres or artists rather than by a record company label.
The Company believes that organizing its websites by music genres such as rock,
jazz and classical music parallels traditional media formats as well as consumer
buying patterns. In addition, the Company believes its genre websites provide an
attractive forum for the consumer to obtain information on specific artists, and
receive updates about related concert tours, music events and other promotions.
 
     Ease of Use.  The Company believes that ease of use in its websites is
crucial to creating widespread usage and strong brand name recognition.
Therefore, the Company's websites and services feature user friendly and
engaging interfaces for customers to both explore information and order music
and music-related products. To make it more intuitive and visually appealing,
the Company is launching an updated, graphical user interface for Music
Boulevard, scheduled for July 1, 1996. The new interface will provide easier
access to information on Music Boulevard and require a user to register only to
complete an initial purchase. The Company places great emphasis on customer
support in order to maintain high customer satisfaction and establish its
websites as services which deliver product in a timely, efficient manner. The
Company intends to continue to add features that will enhance the ease of use of
its services.
 
     Competitive Pricing.  The Company monitors pricing trends among online
music retail sites, other mail-order music retail businesses and traditional
retailers, and adjusts pricing strategies and tactics as necessary to maintain
competitiveness. The Company expects its competitive pricing policy to be
particularly attractive to certain international music consumers, as retail
prices for CDs in many markets outside of the U.S. tend to be higher than CD
prices domestically. The Company offers its products for sale in the U.S. and
outside of the U.S. at the same price. For the international consumer, the
Company believes that its prices are competitive, even after taking into account
shipping, handling, customs duties and local taxes.
 
     Customer Profiling and Personalized Service.  The Company plans to utilize
information provided by its users to improve product marketing and
merchandising. The Company expects to use this data to enable its users to have
a personalized interactive experience. For example, one of the most popular
areas of Jazz Central Station is the "listening car" where users can look up
their favorite recording artists and access those artists' favorite recordings.
 
     Foreign Language Websites.  In order to reach the global audience served by
the Internet and commercial online services effectively, in selected foreign
markets the Company intends to develop its online communities in the local
language. These websites incorporate localized content and will later feature
local artists. When consumers in these countries wish to purchase CDs or
cassettes, they will be directed to the Music Boulevard website which will also
provide ordering instructions in their native language. The first foreign
language website will be launched in Japan in June 1996. The Company believes
that the launch of N2K Japan represents a critical step in its strategic
international development, since Japan is the second largest market in the world
for recorded music.
 
  Benefits to Industry Participants
 
     A New, Complementary Music Distribution Channel.  By designing an effective
multimedia marketing, promotion and delivery system on the Web, the Company
offers traditional record labels a cost-effective and efficient means to market,
sell and distribute music products on a worldwide basis. Through traditional
music retail channels, an album's worldwide marketing, promotion and
distribution requires substantial coordination, organization and expense. Today,
a new release is typically promoted through radio airplay, print advertising,
music videos and concert tours. Due to the growth in recent years of the number
of new releases, the promotion of new artists has become a more complex task.
Marketing efforts must cover a greater number of releases and each release
competes for the attention of consumers. See "-- Industry Overview -- The
Recorded Music Industry." The Company's online service is designed to simplify
this process by providing every user access to music and recording artists on
the first day of a product's release. Distribution over the Web and online
services offers content to some marketplaces in which this content was
previously unavailable on a timely basis. In addition, Internet merchants'
requirements for physical store premises, warehouses and distribution centers
are greatly reduced, and in some cases eliminated, by allowing shipment directly
from the
 
                                       32
<PAGE>   35
 
distributor to the consumer. The Company believes that utilizing this new online
distribution channel will create a shift in the marketing of recorded music.
 
     Global Reach and Targeted Audiences.  The global reach of the Internet and
online services provides advertisers with opportunities to reach a broad
audience by targeted market segments. As the Company adds foreign language sites
and international operations, it may offer local advertisers additional
opportunities to market products and services for highly focused, defined
audiences around the world. In addition, the Company plans to gather, process
and analyze data resulting from customer usage of its websites and purchases to
enhance the ability of music industry participants and other advertisers to
target their promotional efforts.
 
     Direct Links Between Recording Artists and Fans.  The Company's music genre
websites and artist-specific websites offer one-on-one communications between
artists and their music fans. These websites allow artists to be showcased in a
multimedia environment with direct access to their fans and, conversely, provide
users with star access, such as via chat lines to music recording artists. The
Company believes that its ability to offer artists a direct link to fans may
attract artists to the N2K Encoded Music label.
 
ENTERTAINMENT PRODUCTS AND SERVICES
 
  Websites
 
     The Company believes it is creating strong brand names in Music Boulevard,
Rocktropolis and Jazz Central Station and seeks to build brand awareness for
each of its music genre websites by providing services with high entertainment
value, leading-edge technology, ease of use and a high level of customer
support. The Company believes that its strong industry relationships with music
publishers, recording artists, record producers and record labels provide access
to a broad range of content which, when combined with the expertise of its
multimedia content development and editorial staff, results in visually
captivating and content-rich websites. By offering content according to music
genre websites, each of which has its own universal resource locator or "URL,"
the Company believes that it can increase traffic to its websites and expand the
amount of time per user visit on its websites. Consumers can access the
Company's Music Boulevard website directly over the Web, through music genre or
artist websites such as Jazz Central Station, Stonesworld and the David Bowie
website, all of which are hotlinked with Music Boulevard, or through online
search directories such as Infoseek, Lycos, Netscape and Yahoo! The Company
believes that both users and advertisers prefer websites with distinct URLs
designed for specific audiences and that this approach enhances the Company's
ability to promote content within each website, encourages more users to
bookmark the Company's websites and attracts greater numbers of third-party
hypertext links to the Company's websites.
 
     The Company intends to establish an advisory board for each of its music
genre websites, comprised of artists, executives, promoters, writers and
educators active in the music industry and focused on that particular music
genre. The Company believes that the combined expertise of its existing and
planned advisory boards will allow it to support the accuracy and authenticity
of each site's information, demonstrate the quality of its products and services
through the advisory boards' stamp of approval, remain on the cusp of new
industry trends and developments and form new strategic partnerships through
which to further enhance and develop its sites.
 
                                       33
<PAGE>   36
 
     The Company's existing and currently planned websites include:
 
<TABLE>
<CAPTION>
    EXISTING WEBSITES       LAUNCH DATE                        DESCRIPTION
- -------------------------  -------------   ----------------------------------------------------
<S>                        <C>             <C>
musicblvd.com............  August 1995     Flagship website of the Company offering
                                           cross-genre, multimedia music information and
                                           merchandise. Music Boulevard is the recipient of the
                                           1995 IIA Award for Best Consumer Website.
jazzcentralstation.com...  January 1996    Genre entertainment website for the global jazz
                                           online community, exploring the contemporary and
                                           traditional worlds of jazz through multimedia
                                           elements. Jazz Central Station is the recipient of
                                           both the 1996 America Online -- Online Music Award
                                           for Best Jazz Cybersite and the 1996 New Media
                                           Invision Award for Best Music-Related Online Site.
rocktropolis.com.........  June 1995*      Genre entertainment website for the global online
                                           rock and pop community, emphasizing high-end
                                           graphical style.
stonesworld.com..........  November 1995   Rolling Stones website featuring innovative
                                           graphics, multimedia elements and album-oriented
                                           content.
davidbowie.com...........  September
                           1995            David Bowie website featuring state-of-the-art
                                           graphics, themed multimedia elements and constantly
                                           updated content.
</TABLE>
 
- --------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                             PROPOSED
    PLANNED WEBSITES        LAUNCH DATE                        DESCRIPTION
- -------------------------  -------------   ----------------------------------------------------
<S>                        <C>             <C>
classicalinsites.com.....  Late 1996       Planned genre entertainment website for the global
                                           online classical music community, exploring Leonard
                                           Bernstein's life and world of classical music
                                           through multimedia elements.
blues....................  1997            Planned genre entertainment website featuring the
                                           Company's recently acquired blues master recordings,
                                           representing blues artists throughout the Southern
                                           U.S.
</TABLE>
 
* Acquired by the Company in June 1996.
 
     Existing Websites.  Music Boulevard is a comprehensive, multimedia music
entertainment resource providing music merchandise and information in an art
deco setting. Launched on the Web in August 1995, Music Boulevard features a
music merchandising center with an approximately 110,000 title catalog, advanced
search functions, 30-second sound samples in a MPEG format, cover art, photos
and song lists. The website also features Music Wire and @Country, the Company's
exclusive daily online music newspapers, edited and written by professional
music journalists, which provides music news, album reviews and concert
information, as well as editorials, artist profiles and product information.
Music Boulevard's editorial staff provides original reporting and reviews
related to the music world which, unlike weekly trade magazines, are immediately
available to consumers and are continuously updated throughout the day. Music
Boulevard also offers Billboard chart listings and access to other major music
publications including Blues Revue, Dirty Linen, e.Bop, Fanfare, Gramophone,
Puncture and SPIN.
 
     The Company sells advertising on and recorded music CDs and cassettes and
related music merchandise through Music Boulevard. Prior to purchasing CDs,
cassettes or other merchandise, a consumer can access a variety of information
about an artist or music group, a song or title or a music genre and can sound
sample various music titles. The Company believes that by offering the consumer
a rich, entertaining buying experience, coupled with the ability to easily
locate a specific artist or song through the Company's proprietary search
engine, it differentiates the N2K purchasing experience from that of many of its
competitors. In addition, the Company offers the consumer the option to purchase
from a selection of approximately 145,000 CD and cassette SKUs produced by
others (representing all of the approximately 110,000 titles currently
available) and to sound sample from a selection of approximately 50,000 tracks.
The Company believes that its sites also offer the broadest range of sound
samples currently available online.
 
                                       34
<PAGE>   37
 
     Jazz Central Station is an in-depth jazz, multimedia music entertainment
and information resource for the global jazz community. Jazz Central Station
explores the contemporary and historical worlds of jazz through text, graphic
and multimedia elements, with featured areas including: Featured Artists,
Recommended Listening, Record Company Cargo Area providing information on jazz
record labels and their artist releases, Musician's Express featuring master
classes by acclaimed jazz artists as well as educational information, Jazz
Destinations highlighting jazz events and venues worldwide and Jazz Cafe
interviews with musicians in RealAudio. Other features include forums, live
chats, cover art, videos, photos, liner notes, reviews, biographies, concert
calendars and educational information. Jazz Central Station is also the official
website for JazzTimes, the International Association of Jazz Educators, George
Wein's Festival Productions, producer of the JVC Jazz Festivals, and the
Monterey Jazz Festival of 1996. In addition, Jazz Central Station includes
artist sites for Chick Corea, Herbie Hancock and Gerry Mulligan. The Company
believes that the programming content provided by JazzTimes magazine (in the
form of highlights of each current issue and archives of past issues) combined
with its experienced editorial staff of writers enables it to provide high
quality, timely and engaging editorial content to its users. Further, in 1996
Jazz Central Station inaugurated the first annual JCS Global Jazz Poll, in which
its online users voted for their favorite artists. The winners have been chosen
and selected winning tracks are being compiled for one of the Company's initial
releases under the N2K Encoded Music label in October 1996. In addition, a
concert event featuring Dave Grusin and the Jazz Central Station all-stars is
scheduled in Japan in connection with the launch of the Company's Japanese
website. Jazz Central Station has an acclaimed Board of Advisors including Chick
Corea, Quincy Jones, Ramsey Lewis, Bruce Lundvall, Dan Morgenstern and George
Wein.
 
     Rocktropolis is an online community that presents high-end graphic style to
create an entertaining, interactive environment for the rock and roll consumer.
Featured areas include: Trash and Chat at the Fins Motel, Featured Artists, In
Spite, the website's own online Hollywood tabloid, The Love Parlor, City Jail
and Musicians Exchange. In addition, users can explore featured artists'
histories and current news through videos, interviews, recommended listening,
e-mail and online chats. In addition, Rocktropolis features the websites of
Sting and The Artist Formerly Known as Prince. Further, the website features its
own Ozone magazine, which covers today's rock music scene with interviews,
reviews and observations.
 
     In late 1996, the Company plans to enhance its Rocktropolis and Music
Boulevard websites by including an alternative rock and pop online music
magazine that targets the music and cultural interests of alternative rock
consumers by interviewing and reviewing current and emerging rock bands, artists
and cultural trends. The magazine will provide daily music news, album reviews,
in-depth special features, offbeat pop culture articles, weekly writers' columns
and scheduled chat events. In addition, the Company intends to offer
sophisticated indexing and searching techniques to allow quick and efficient
access to past content. This feature will be accessible through both the Music
Boulevard and Rocktropolis websites. The Company recently hired Rob Lord, a
founder of IUMA, Internet Underground Music Archives, to oversee the development
of the alternative rock and pop online music magazine.
 
     Stones World is a Rolling Stones website with heavy emphasis on the album
Stripped and the Voodoo Lounge CD-ROM. The website features a comprehensive
catalog of the Rolling Stones' music, comprised of five separate sections:
EXTRA, PAST, STRIPPED, CD-ROM and FUTURE. This website incorporates leading-edge
animation, streamed real time audio and sound samples as well as archival
photos, band and concert information, interviews, full lyrics and an interactive
poker game.
 
     David Bowie's Outside takes visitors inside the murder-mystery world
explored in Bowie's short story, "The Diaries of Nathan Adler." The website
features streamed animation, state-of-the-art graphics, sound samples, band
biographies, concert information, interviews, cover art, the full text of "The
Diaries of Nathan Adler" and information on Bowie's latest releases and tours.
In addition, the website contains a special section devoted to David Bowie
himself which features the artist's websites and samples of his own digital art.
 
     Planned Internet Sites.  In late 1996, the Company plans to launch a
classical music genre website (WWW.CLASSICALINSITES.COM) which will offer a
comprehensive guide to the world of classical music. The website will enable the
user to explore the history of classical music, listen to performances and
discussions by legendary artists, seek out worldwide classical events and
purchase music and related merchandise online.
 
                                       35
<PAGE>   38
 
Planned features include: artist exhibits, recommended listening areas, video
and product reviews, online access to the fine arts collection at the Library of
Congress, a music learning center, online chats with artists, producers and
Company staff and listings for worldwide classical radio, tour schedules,
concerts and festivals. The Company recently finalized an agreement with the
Leonard Bernstein estate which will establish WWW.CLASSICALINSITES.COM as the
online website of Leonard Bernstein's life and world of classical music,
featuring a retail area, educational room, tour of his studio, articles on his
artistic legacy and current classical music activities. The Company intends to
position its classical website as the definitive website for the classical
enthusiast, from novice to professional, to locate, explore and learn about
classical music.
 
     In 1997, the Company plans to launch a blues genre website featuring the
Company's recently acquired blues recordings representing blues artists
throughout the Southern United States. Planned additional blues genre website
features include photos, interviews, song lists, artwork and videos.
 
     The Company's planned websites have not yet been fully developed. No
assurance can be given that the Company's planned websites will be launched with
the features currently planned or at the time presently scheduled or at all.
 
  Planned Record Label
 
     Management plans to develop N2K Encoded Music as a full-service music
company that will create, produce, license, acquire, and market high-quality
recorded music which will be distributed through online as well as through
traditional retail and other distribution channels. In building and expanding
the N2K Encoded Music label across all music genres, the Company will license
master recordings from other labels, acquire master recordings and publishing
catalogs and sign artists to the label. The Company expects that all of its
releases will be in the Enhanced CD format, which utilizes advanced recording
techniques while incorporating quicktime video clips, interviews, text and an
integrated, seamless link to the Company's online sites. The Company believes
that the E-CD format will create more visibility for the Company's websites as
it offers and highlights multimedia features for the computer users. The Company
believes that by adding multimedia information to an audio compact disc, the
E-CD format will optimize available CD space and provide an economical marketing
tool for artists to reach their fans. This feature represents a new approach
that the Company expects to bring to its online CD sales; however, the Company
anticipates that in the short-term the majority of N2K Encoded Music's new E-CD
recordings will be sold in traditional record stores. Currently, the Company
believes that no other record label is offering all of its new music recording
products as Enhanced CDs and believes that this strategy will give the Company a
marketing advantage in the industry.
 
     In addition, just as the growth in consumers' purchases of audio CDs was
stimulated by the growth in audio CD players beginning in the early 1980s, the
Company believes that the growth in the sales of CD-ROM equipped personal
computers will stimulate consumer purchases of Enhanced CDs. For example, in
1994, over 50% of home personal computers purchased were CD-ROM equipped.
 
     In the Fall of 1996, N2K Encoded Music's two initial releases will feature
a compilation recording of outstanding jazz musicians selected through Jazz
Central Station's first online global jazz poll and a retrospective artist
release from Gerry Mulligan, which will include two new original tracks. N2K
Encoded Music's first blues release is planned for February 1997, in the form of
an all star duet album, which is planned to coincide with the Company's
anticipated launch of its blues website. In addition, the Company has acquired
numerous master recordings of previously undiscovered blues artists from
throughout the Southern U.S., of which a number will be released on a quarterly
basis beginning in 1997.
 
     As part of the Company's strategy to establish the N2K brand name, all of
N2K Encoded Music's label releases are currently planned to include
comprehensive media campaigns tied to promotional events. For example, the
Company's first blues release is scheduled to coincide with Black History Month
in February 1997 and to be promoted online, in magazines and on radio, with
corresponding music-related merchandise offerings. The Company plans to price
its Enhanced CDs on a comparable basis with other music CDs.
 
     The Company has not yet launched N2K Encoded Music, nor has it released any
recordings. In attempting to establish its planned record label, N2K will face
risks inherent in the recorded music industry.
 
                                       36
<PAGE>   39
 
See "Risk Factors -- Risks Inherent in Recorded Music Industry and Record Label
Launch." No assurance can be given that the Company will be successful in
establishing and building its planned record label.
 
  Entertainment Products and Services Marketing
 
     Website Promotion.  The Company has developed a strategy to promote its
Music Boulevard website to record labels through links with record label
websites and through its relationship with Soundscan. The Company believes that
a no-fee hotlink between Music Boulevard and label websites will be extremely
attractive to record companies who cannot sell directly on their own websites
because of conflicts with partnered retailers. Hotlinks are established through
an icon on the record label website, which advertises that a particular album or
act is available for purchase on Music Boulevard. By clicking on the icon, a
user is able to enter Music Boulevard to browse or purchase. In its relationship
with Soundscan, the Company shares its weekly records of recorded music
transactions taking place on its Music Boulevard website. Soundscan uses this
information, along with data from the vast majority of music retail locations
nationwide to tally U.S. music sales. Such data are the exclusive criteria in
compiling the Billboard magazine charts.
 
     In order to generate site traffic and coordinate advertising among its
various sites, the Company advertises through online search directories such as
Infoseek, Lycos, Netscape and Yahoo!, as well as on selected music websites. The
Company's strategy in advertising online is to attract high volume traffic onto
the websites. The Company also barters advertising space with magazines such as
JazzTimes and Details in exchange for print advertisements.
 
     Advertising Sales and Sponsorships.  Although the market for
Internet-related advertising represents only a small portion of today's total
advertising market, industry sources project rapid growth for this sector. While
the Company believes that content providers will be the driving force for the
growth of the Internet and online services, it expects that as a result of this
growth, these channels will attract more advertising and sponsorship revenues.
The Company believes that additional factors of importance to advertisers
include audience size, user base demographics, ability to target market,
interactive capability and the online medium's overall advertising
effectiveness. In order to enhance the attractiveness of its websites to
advertisers, the Company intends to deploy an advertising management software
system to facilitate site traffic management, as well as advertising space
management and implementation. The Company is currently evaluating proposals for
third-party independent auditing and verification of the Company's site traffic.
These enhancements will improve the Company's ability to market its websites
aggressively for targeted advertising (by demographics or genre). The Company
has just begun to sell banner advertising on Music Boulevard. With the re-launch
of the Music Boulevard user interface, the Company's plans include an increased
emphasis on generating advertising sales.
 
     Merchandising.  The Company's merchandising strategy is based upon
generating traffic on its websites, because the Company believes that increased
website traffic will generate more music and music-related merchandise sales. To
support this strategy, the Company's merchandising efforts are designed to
entertain, inform and stimulate the user along his or her way to purchasing
music products. N2K provides a variety of merchandise and, in its view,
compelling content, to encourage online users to visit its websites. The Company
believes that its editorial commitment to high-quality music-related content
offered free of charge is an important differentiator from other music-related
and music-merchandising sites. A key aspect of the Company's merchandising
strategy is to link its music genre, artist and title-specific content, such as
record reviews, artist profiles and special promotions, to the music ordering
section of Music Boulevard, to both stimulate and facilitate consumer purchases
of CDs and other music products. The Company seeks to differentiate itself in
the marketplace by providing a diverse product mix of music and related
merchandise and become a convenient one-stop online store for music lovers.
 
     The Company facilitates repeat buying by allowing buyers to choose a
password on their first sale. This password eliminates the need for the buyers
to re-input credit card and shipping information and makes the next purchase a
much simpler process. The Company also plans to implement a frequent buyers club
membership program in connection with the scheduled re-launch of the Music
Boulevard user interface on July 1, 1996, whereby members in the Company's
online club will receive discounts on music product
 
                                       37
<PAGE>   40
 
purchases. The Company considers the club concept a powerful marketing tool, the
ultimate value of which is the ability to collect user demographics and through
a club discount, attempt to obtain all or a greater portion of a member's online
music purchases.
 
     The Company monitors pricing trends among online music retail sites, other
mail-order music retail businesses and traditional retailers and adjusts pricing
strategies and tactics as necessary to maintain competitiveness. The Company
seeks to encourage the purchase of multiple titles by capping shipping costs and
guaranteeing two-day delivery within the U.S. for purchases of five titles or
more. To date, the Company estimates that the average purchase on Music
Boulevard is approximately three CDs or cassettes per order.
 
     Global Sales.  Over 35% of the Company's online sales to date have been
generated in non-U.S. markets. Over the past several years, international music
sales have been growing faster than domestic music sales. The Company believes
that its Internet and online distribution channels, the Web and online services,
are well positioned to participate in this international growth. In addition to
selling current releases, the Company offers a comprehensive product line not
generally available in most international markets. N2K believes that it can
enhance its global user base by providing localized content on all of its online
sites. To achieve this objective, the Company plans to build websites in
different languages, beginning with a Japanese language website which will be
launched in June 1996. Additionally, the Company plans to establish N2K Asia to
service the Southeast Asian market. The Company plans to mirror these operations
in the European market and provide localized content and up-to-date information
on local music scenes.
 
  Fulfillment and Customer Service
 
     The Company places an emphasis on product fulfillment in order to maintain
high customer satisfaction, price competitiveness and establish the Company's
websites as services which deliver product in a timely and efficient manner. The
Company uses Valley, a third-party fulfillment operation, to ship CDs and
cassettes, while handling all of the customer billing functions itself. Credit
card authorization is also handled by a third party, First USA, Inc. See "Risk
Factors -- Dependence on Key Suppliers."
 
     The Company believes that high levels of customer service and support are
critical to the value of its services and to retaining and expanding its user
base. While it is common to find an e-mail feedback mechanism on most Internet
services, the Company believes that its level of customer service support
(staffed 76 hours a week, accessible via phone and e-mail) is uncommon. The
Company provides customers with the opportunity to communicate via e-mail,
facsimile and toll-free and local telephone numbers. Company representatives
handle general questions about the service as well as register customers' credit
card information over the phone. The Company believes that these representatives
are a valuable source of feedback regarding user satisfaction, which the Company
uses to improve its services. Customers of the Company are not charged for
service and support.
 
N2K INFORMATION SERVICES
 
     In the information services business, the Company has offered online
business information retrieval services since 1984. The Company's principal
service in this area is EasyNet, a premium-priced reference service licensed to
online content distributors, primarily CompuServe (under the brand name IQUEST)
and NIFTY (under the brand name INFOCUE). This service offers business credit
data, research reports, company fact sheets and newsletters, as well as general
reference information such as newspapers and magazines, from more than 1,000
sources. Historically, the Company has generated information services revenues
through transactional charges to its distributors for their customers' use of
the services.
 
     The online information services business has become more competitive and
price sensitive as general reference content, such as newspapers and magazines,
has become increasingly available over the Internet at minimal or no cost to the
user. Recognizing the changing competitive environment, the Company re-focused,
beginning in 1995, its online information services strategy, resources and
business approach in three key areas by (i) continuing to serve its existing
distributors by emphasizing its premium database content; (ii) developing new
Web-based services and software packages to deliver its database content to
business
 
                                       38
<PAGE>   41
 
market niches such as the SOHO market and (iii) creating proprietary databases
for targeted marketing to music consumers.
 
     In June 1995, the Company unbundled IQUEST services and lowered its prices,
thereby significantly reducing the Company's revenues. The Company's unbundling
strategy was intended to competitively position EasyNet and highlight the
service as a source of premium databases. The Company believes that these
databases, which include information such as credit reports, intellectual
property information, scientific research and government reports, are less price
sensitive than general reference information. In addition, the Company is
transitioning from a textual user interface to a more graphical user interface.
The Company has designed its graphical user interface to offer easy, integrated
access to key business and research resources such as D&B Information, UMI,
Thomson & Thomson, Derwent, IAC and TRW.
 
     The Company has also recognized the growing consumer and small business
usage of online services, and has responded by expanding its current offerings
to include web-based software and information services for the business and SOHO
markets. In conjunction with Knight-Ridder, the Company has developed desktop
software packages to provide access to databases and information sources that
focus on the specialized needs of the business and professional markets. These
products are currently available using N2K's customized versions of Windows
software and are marketed as Knight-Ridder's Custom DIALOG and DIALOG
Quickstarts, Engineering Information's EISE and Thomson & Thomson's T&T
Trademark Center. To date, key applications targeting the specific needs for
engineering, intellectual property, market research, medicine and health and
pharmaceuticals information have been developed for the business and SOHO
markets. The Company supports the marketing efforts of its publishers for these
applications.
 
     The Company plans to use its content aggregation and database management
experience from its online information business in order to gather, process and
distribute proprietary music databases to enhance the Company's ability to
target market to music consumers. In building these databases, the Company will
aggregate information provided voluntarily from its users, regarding the online
music consumers' preferences, habits and desires, which will be organized around
such factors as music genre, geographic distribution and consumer demographic
profile. The Company believes that this information will be important to improve
product marketing and merchandising for the Company, music industry companies
and advertisers.
 
N2K TECHNOLOGY
 
     Over the past twelve years, the Company has developed sophisticated
information services delivery and user tracking systems by integrating
third-party systems, when available, and by developing proprietary tools. The
Company's integrated systems and tools provide functionality in five primary
areas: (i) multimedia asset management, (ii) website development, (iii) audio
encoding and delivery, (iv) fault tolerance and (v) security. At the same time,
the systems and tools provide scalability to maintain performance as the number
of users of the system and the amount of data processed increases and
extensibility to add new functionality as new needs and technologies emerge.
 
     Multimedia Asset Management.  Central to the Company's system is a database
management system necessary to index, retrieve and manipulate the Company's
continuously growing multimedia content in a distributed (multi-site)
environment. The database management system allows for rapid searching, sorting,
viewing and distribution of, among other things, audio samples, video clips,
cover art, photos and original art. The Company has chosen Oracle 7.3 as its
database management system and was an early adopter of Oracle Media Objects,
which it uses for the multimedia asset management application. Based on the
quality and creativity of the Company's interfaces, Oracle Corporation selected
the Company as one of its featured developers for Oracle Open World, its
infomercial and international product roadshow which was introduced in 1996.
 
     Website Development.  The catalog of CDs and cassettes, stored in an Oracle
database, forms the core of the music entertainment content collection and
contains links to related content (e.g., audio samples, images, editorial
content and charts.) Each individual page of the Company's Music Boulevard
website is built dynamically from these elements using a proprietary web page
template technology. This template technology results in the separation of the
page look and feel from the individual data elements, which eliminates software
 
                                       39
<PAGE>   42
 
updates for page layout changes and greatly reduces the programming required to
maintain a growing amount of content. The Company has developed software
specifically to enable its editorial and creative staff to develop content
tightly linked into this environment. As a result, the Company can efficiently
import editorial content from third-party sources such as magazines. For
high-volume, non-secure Web transactions the Company uses the Apache web server,
a modular, high-performance server. A senior member of the Company's technical
staff is a member of the Apache development team.
 
     Audio Encoding and Delivery.  The ability to deliver the highest possible
audio quality to the user's desktop is fundamental to the Company's strategy.
The Company chose MPEG compression for its audio samples because of its superior
quality and has invested in developing high-quality downloadable sound samples
at up to a 40:1 compression ratio. In light of current user patterns, the
Company also uses Progressive Networks' RealAudio 2.0 format for delivering
realtime streaming audio samples in certain of its websites. The Company is
actively pursuing new and emerging audio technologies.
 
     Fault Tolerance.  The Company has operated a 24-hour a day, seven-day a
week computing facility in the online information industry for many years.
Drawing on this experience, the Company's website architecture uses redundant
servers and RAID (redundant array of independent drives) storage systems so that
downtime due to system outages or maintenance needs is minimized. The Company
runs its Oracle database on the Sun Enterprise 4000 server because of its fault
tolerant characteristics including redundant, hot-swappable components. To
further enhance fault tolerance, the Company expects to run Oracle's parallel
database version as soon as possible. See "Risk Factors -- Risk of System
Failure or Inaccuracy."
 
     Security.  The Company believes that a high level of security is necessary
in order to conduct commerce over the Internet. The Company employs a
proprietary firewall to keep its Internet connections secure. The Company uses
the Netscape Commerce Server for secure electronic transactions over the
Internet. It uses proprietary EDI (electronic data interchange) interfaces and
private networks to ensure the security of customer credit card transactions and
other order information shared with the Company's fulfillment partner and third
party billing company. The Company plans to implement standardized electronic
transaction mechanisms (such as Secure Electronic Transaction technology, the
standard being developed by major credit cards) as they become commercially
available.
 
     Scalability and Extensibility.  The structure of the Company's hardware and
software is built upon a distributed transaction processing model which allows
software to be distributed among multiple parallel servers. This architecture
allows the Company to scale by either adding new servers or increasing the
capacity of existing servers. The current system is designed to easily scale
from several hundred simultaneous users to at least five thousand users while
maintaining both user performance and cost per transaction. In the rapidly
changing Web environment, the ability to update the application system to stay
current with new technologies is important. The system's template technology and
modular database design allow the addition or replacement of server-based
applications such as multimedia formats and delivery systems, additional EDI-
based fulfillment partners and search and retrieval engines. This architecture
also enables low cost, rapid deployment of additional websites that integrate
with the shopping and genre websites.
 
     Advanced Technologies.  The Company continually evaluates emerging
technologies and new developments in Web and CD authoring. Technologies with
which the Company is currently working include Sun's Java language and related
tools for creating intelligent client-side applets, Virtual Reality Modeling
Language (VRML) for developing three dimensional environments, emerging
electronic payment and transaction methods, high bandwidth delivery media,
Macromedia Director software and Apple Media tools to link Enhanced CDs to the
Company's websites, the Real Time Protocol (RTP) for orderly delivery of
multimedia content over the Internet and efforts to re-engineer streaming audio
technologies using existing high-quality compression algorithms.
 
                                       40
<PAGE>   43
 
COMPETITION
 
  Music Entertainment
 
     The market for Internet and online service and content providers is highly
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of websites on the Internet competing for consumers'
attention and spending has proliferated. Currently, there are more than one
hundred music business purchase point sites on the Internet and, with no
substantial barriers to entry, the Company expects that competition will
continue to intensify. In addition to competing with independent Internet
retailers and traditional music retail chains with websites on the Internet, the
Company competes with traditional retail stores, including chains and
megastores, catalog merchandisers, music clubs and telephone retailers.
 
     The Company believes that the primary competitive factors in providing
music entertainment products and services via the Internet are name recognition,
variety of value-added services, ease of use, price, quality of service,
availability of customer support, reliability, technical expertise and
experience. The Company believes that its success in this market will depend
heavily upon its ability to provide high quality, entertaining content in an
easy to navigate format, along with cutting-edge technology and value-added
Internet and online services. Other factors that will affect the Company's
success in this market include the Company's continued ability to attract
experienced marketing, sales and management talent, and the expansion of global
support, training and field service capabilities. The Company believes that its
editorial commitment to high-quality music-related content offered free of
charge is an important differentiator from other music-related and
music-merchandising websites. N2K Encoded Music will compete directly with
established record label companies and with other music producers and
distributors, any of which have significantly greater financial, technical and
marketing resources, longer operating history, greater name recognition and more
established relationships with advertisers than the Company. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors.
 
  N2K Information Services
 
     The Company's information services products face current and potential
competition from numerous online and Internet content providers who serve the
consumer and professional markets. There are few barriers to entry, and current
and new competitors can launch new sites at relatively low cost. This
competition falls primarily into the following three broad categories, (i) low
cost content providers, (ii) vertical content aggregators and (iii) suppliers of
the Company's content. The Company believes that the primary competitive factors
in providing online information to the consumer and business professional user
market include the quality of content, the demographics of the Company's online
consumers and pricing. Given the intense competition among online and Internet
content providers, there can be no assurance that the Company will be able to
compete successfully against current or future competitors with respect to any
of these competitive factors.
 
     Many of the Company's current and potential competitors in the music
entertainment and online information services businesses have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and larger existing customer bases than the Company. In
addition, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products or services
than the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors.
 
EMPLOYEES
 
     As of May 31, 1996, the Company had 108 full-time employees, including 69
in operations and development, 23 in sales and marketing and 16 in general and
administrative. As of May 31, 1996, the Company also had 22 part-time employees,
primarily focused on customer service and 12 consultants, primarily focused on
the Company's music entertainment business. The Company's future success
depends, in significant part, upon the continued service of its key technical,
editorial, sales, product development and
 
                                       41
<PAGE>   44
 
senior management personnel and on its ability to attract and retain highly
qualified employees. There is no assurance that the Company will continue to
attract and retain high-caliber employees, as competition for such personnel is
intense. The Company's employees are not represented by any collective
bargaining organization. The Company has never experienced a work stoppage and
considers relations with its employees to be good.
 
TRADEMARKS AND PATENTS
 
     The Company owns trademarks for Music Boulevard, Telebase, Telebase with
Logo, EasyNet, Corporate EasyNet, ANALY$T, ARTIST Gateway and Knowledge Gateway.
Trademark applications have been filed for Music Blvd., Jazz Central Station and
Rocktropolis. In connection with its Jazz Central Station trademark application,
the Company has received notice of a challenge to its application by another
entity claiming prior use of the name. Although the Company believes it will
prevail, if successfully challenged, the Company may have to pay royalties for
or change the Jazz Central Station name. The Knowledge Gateway Computer (KGC)
system is based upon technology that is patented under U.S. Patent #4,774,655,
issued to the Company in 1988 and expiring in 2005. This patent relates to the
fundamental gateway aspects of the KGC system.
 
FACILITIES
 
     The Company's corporate headquarters are located in the New York
Information Technology Center ("NYITC") in New York, New York. The Company
leases its facilities and certain other equipment under operating and capital
lease agreements. The Company entered into a new lease agreement for
approximately 13,300 square feet of office space at NYITC commencing on December
22, 1995. NYITC's facilities offer advanced technology amenities including state
of the art voice, video and data transmission and advanced telecom and data
security. The term of the lease expires on May 31, 2001. The Company has entered
into a lease agreement for an additional approximately 7,700 square feet in the
NYITC.
 
     The Company leases an additional 15,000 square foot facility in Wayne,
Pennsylvania which houses the Company's main computer facility. The term of the
lease expires on August 31, 2001. The Company has signed a lease agreement for
additional space of approximately 6,400 square feet at the Wayne, Pennsylvania
facility. There can be no assurance that a system failure at this location would
not adversely affect the performance of the Company's services.
 
     The Company believes that its existing facilities are adequate for its
current requirements and that additional space can be obtained to meet its
requirements for the foreseeable future.
 
LITIGATION
 
     The Company and 17 other entities have been named as defendants in a civil
action captioned Interactive Gift Express v. CompuServe, Inc. et al., which is
pending in the U.S. District Court, Southern District of New York, Docket 95 CV
6871 (BSJ). The plaintiff in this action alleges infringement of certain
intellectual property rights, and seeks treble damages and costs in an
unspecified amount, as well as other declaratory and injunctive relief. The
Company believes that the claims against it are without merit and intends to
vigorously defend against them. The Company believes that this lawsuit, even if
adversely determined, will not have a material adverse effect on the Company's
business, financial condition or results of operations.
 
                                       42
<PAGE>   45
 
                                   MANAGEMENT
 
OFFICERS AND DIRECTORS
 
     The following table sets forth the names, ages and positions of the
Company's executive officers and members of the Board of Directors as of the
date of this Prospectus:
 
<TABLE>
<CAPTION>
                     NAME                    AGE            POSITION WITH COMPANY
    ---------------------------------------  ---   ---------------------------------------
    <S>                                      <C>   <C>
    Lawrence L. Rosen(1)...................  56    Chairman of the Board of Directors and
                                                     Chief Executive Officer
    Jonathan V. Diamond....................  37    Vice Chairman and Director
    Robert David Grusin....................  61    Vice Chairman and Director
    James E. Coane.........................  55    President, Chief Operating Officer and
                                                     Director
    Bruce Johnson..........................  46    Vice President, Secretary, Treasurer
                                                   and Chief Financial Officer
    Jerold Rosen...........................  27    Senior Vice President and General
                                                     Manager-Online Entertainment
    Daniel E. Meyer........................  39    Senior Vice President and General
                                                     Manager-Online Information
    Robert C. Harris, Jr.(1)(2)............  49    Director
    Susanne Harrison(1)(2).................  51    Director
</TABLE>
 
- ---------------
 
(1) A member of the Compensation Committee.
 
(2) A member of the Audit Committee.
 
     Prior to the Merger, certain of the individuals listed below served as
executive officers and directors of New York N2K, while others served as
executive officers and directors of Telebase.
 
     Lawrence L. Rosen has served as Chairman of the Board of Directors since
the Merger. Mr. Rosen has served as Chief Executive Officer of the Company since
the Merger. From June 1995 until the Merger, Mr. Rosen was Co-Chairman of New
York N2K. Previously, Mr. Rosen and Mr. Grusin formed Grusin/Rosen Productions
in 1976 to produce artists' recordings for major record labels. Mr. Rosen served
as engineer, producer and Co-President, operating under a global distribution
agreement with Arista Records. In 1982, Mr. Rosen co-founded GRP with Mr.
Grusin, and it became one of the first worldwide record labels to adopt an
all-digital, all-CD philosophy, with Mr. Rosen as its Co-President. In 1990, GRP
was acquired by MCA Inc. and Mr. Rosen served as President and Chief Executive
Officer to operate GRP as a division of the MCA Music Entertainment Group until
1995. Mr. Rosen has served as a member of the Board of Governors of the New York
Chapter of the National Association of Recording Arts and Sciences, is a member
of the Grammy Screening Committee and serves on the Board of the National
Foundation for the Advancement of the Arts. Mr. Rosen attended the Manhattan
School of Music.
 
     Jonathan V. Diamond has served as Vice Chairman and a director of the
Company since the Merger. From June 1995 to the Merger, Mr. Diamond served as
Co-Chairman of New York N2K. From 1991 to 1995, Mr. Diamond founded and was
Chairman of the J. Diamond Group, a holding company which acquired and launched
six media and entertainment companies in the U.S. and the U.K., including
Vermilion Films, which produced the feature film "Let Him Have It." From 1984 to
1990, Mr. Diamond served as a director and Executive Vice President of GRP,
where he was responsible for its business and financial strategy. Prior to his
association with GRP, Mr. Diamond founded Diamond Investments, his own
investment firm, which acquired or launched companies in the media,
entertainment and broadcasting areas. Mr. Diamond has served on the Advisory
Board of Columbia University Graduate School of Business. Mr. Diamond holds a
B.A. in Economics and Music from the Honors College of the University of
Michigan and a M.B.A. from Columbia University's Graduate School of Business.
 
                                       43
<PAGE>   46
 
     Robert David Grusin has served as Vice Chairman and a director of the
Company since the Merger. From June 1995 to the Merger, Mr. Grusin served as a
director of New York N2K. In 1976, Mr. Grusin and Mr. Rosen formed Grusin/Rosen
Productions to produce artist recordings for major music labels, which lead to a
label deal with Arista in 1978. In 1982, Mr. Grusin and Mr. Rosen founded GRP as
an independent record company with Mr. Grusin as Co-President. In 1990, GRP was
acquired by MCA Inc. and Mr. Grusin served as Executive Vice President of GRP,
which became a division of the MCA Music Entertainment Group, until 1995. Mr.
Grusin, a composer, producer and musician, is the recipient of ten Grammy Awards
and one Academy Award. Mr. Grusin serves on the College of Music Advisory Board
at the University of Colorado, and has received honorary doctorates from both
Berkelee College of Music and the University of Colorado.
 
     James E. Coane has served as President, Chief Operating Officer and a
director of the Company since the Merger. From April 1987 to the Merger, Mr.
Coane served as President and Chief Executive Officer of the Company and as
Chairman of the Board of Directors from 1993 until the Merger. Previously, from
1984 to 1987, Mr. Coane served as President and Chief Executive Officer of
Morris Decision Systems, Inc., a marketer and supplier of microcomputers and
related peripherals. Mr. Coane serves on the Board of Directors of the
Information Industry Association and the Ben Franklin Technology Council and as
the Chief Executive Officer of the Council of Growing Companies. Mr. Coane is a
Phi Beta Kappa graduate of Duke University with an A.B. in Economics and
Business Administration.
 
     Bruce Johnson has served as Secretary, Treasurer, Vice President and Chief
Financial Officer of the Company since 1988. Mr. Johnson has sixteen years of
previous experience in public accounting and financial management with positions
at Arthur Andersen & Co., Marriott Corp. and SEI Corp. Mr. Johnson holds a
degree in Accounting from St. Joseph's University and a M.B.A. in Finance from
Drexel University and is a Certified Public Accountant.
 
     Jerold Rosen has served as Senior Vice President and General Manager-Online
Entertainment since the Merger. From June 1995 to the Merger, Mr. Rosen served
as President of New York N2K. From 1988 to 1992, Mr. Rosen served in various
capacities at GRP, including serving as head of its music licensing department.
Mr. Rosen holds a B.A. in Political Economics from Tulane University and a
M.B.A. in Finance from Rutgers University. Jerold Rosen is the son of Lawrence
L. Rosen.
 
     Daniel E. Meyer has served as Senior Vice President and General
Manager-Online Information since the Merger. From 1988 to December 1995, Mr.
Meyer was President and founder of Advanced Research Technologies, Inc. ("ART"),
an information gateway company. In December 1995, ART was acquired by and merged
into the Company. Mr. Meyer has served as a product design consultant for the
Company since 1984. Mr. Meyer holds a B.S. from the University of Maryland and a
certificate in Small Business Management from The Wharton School of the
University of Pennsylvania.
 
     Robert C. Harris, Jr. has served as a director of the Company since
February 1996. Mr. Harris is a co-founder and currently serves as a Managing
Director of Unterberg Harris. From 1984 to 1989, he was a General Partner,
Managing Director and Director of Alex. Brown & Sons Incorporated. From 1979 to
1984, he was a Partner of Robertson Stephens & Company. Mr. Harris is a Director
of Microlytics, Inc., Mobile Data Solutions Inc. and a number of private
companies. Mr. Harris is a graduate of the University of California at Berkeley,
where he received B.S. and M.B.A. degrees.
 
     Susanne Harrison has served as a director of the Company since 1993. Ms.
Harrison has been General Partner of the high technology capital funds, Poly
Ventures, Limited Partnership and Poly Ventures II, Limited Partnership, since
1989 and 1991, respectively. Prior to joining Poly Ventures, Ms. Harrison was
Vice President for Technology Investment Banking at Steinberg and Lyman Inc.
from 1983 to 1987. From 1977 to 1982, she held various management positions at
Symbol Technologies, Inc., a supplier of bar-code laser scanners and portable
terminals. Ms. Harrison serves as a director of several privately-held high
technology portfolio companies, as well as a director of the Long Island Venture
Group. Ms. Harrison holds a B.A. from Hunter College, a M.A. from the State
University of New York and a M.B.A. from Adelphi University.
 
                                       44
<PAGE>   47
 
     Lawrence L. Rosen, Jonathan V. Diamond, Robert David Grusin, James E.
Coane, Robert C. Harris, Jr. and Susanne Harrison were elected to the Board of
Directors pursuant to a stockholders agreement (the "Stockholders Agreement")
dated as of February 13, 1996, by and among Lawrence L. Rosen, Jonathan V.
Diamond, Robert David Grusin, James E. Coane, Charles C. Wilson III, Poly
Ventures II, Limited Partnership, AT&T Corporation, Gary Lauder and Unterberg
Harris Interactive Media Limited Partnership, CV, in which each party agreed to
vote its shares of capital stock to elect six directors as specified therein.
Simultaneously with the closing of the Offering, the Stockholders Agreement will
terminate in accordance with its terms.
 
     Each director holds office until the next annual meeting of stockholders or
until a successor has been duly elected and qualifies, or until his or her
earlier death, resignation or removal. The Company's executive officers are
appointed annually by the Board of Directors and serve at the discretion of the
Board of Directors.
 
LIMITATIONS ON DIRECTORS' LIABILITY
 
     Liability Limitation.  The Company's Certificate of Incorporation provide
that a director of the Company shall not be personally liable to it or its
stockholders for monetary damages to the fullest extent permitted by the
Delaware GCL. In accordance with the Delaware GCL, the Certificate of
Incorporation does not eliminate or limit the liability of a director for acts
or omissions that involve intentional misconduct by a director or a knowing
violation of law by a director, for voting or assenting to an unlawful
distribution or for any transaction from which the director will personally
receive a benefit in money, property or services to which the director is not
legally entitled. The Delaware GCL does afford persons who serve on the board of
directors of a Delaware corporation protection against awards of monetary
damages for negligence in the performance of their duties as directors. The
Delaware GCL does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care. Any
amendment to these provisions of the Delaware GCL will automatically be
incorporated by reference into the Certificate of Incorporation, without any
vote on the part of its stockholders, unless otherwise required.
 
     Indemnification Agreements.  Simultaneously with the completion of the
Offering, the Company and each of its directors will enter into indemnification
agreements. The indemnification agreements will provide that the Company will
indemnify the directors against certain liabilities (including settlements) and
expenses actually and reasonably incurred by them in connection with any
threatened or pending legal action, proceeding or investigation (other than
actions brought by or in the right of the Company) to which any of them is, or
is threatened to be, made a party by reason of his or her status as a director,
officer or agent of the Company or his or her serving at the request of the
Company in any other capacity for or on behalf of the Company, provided that (i)
such director acted in good faith and in a manner at least not opposed to the
best interests of the Company, (ii) with respect to any criminal proceedings,
such director had no reasonable cause to believe his or her conduct was
unlawful, (iii) such director is not finally adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the Company,
unless the court views in light of the circumstances that the director is
nevertheless entitled to indemnification and (iv) the indemnification does not
relate to any liability arising under Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or the rules or regulations
promulgated thereunder. With respect to any action brought by or in the right of
the Company, directors may also be indemnified, to the extent not prohibited by
applicable laws or as determined by a court of competent jurisdiction, against
expenses actually and reasonably incurred by them in connection with such action
if they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the Company.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has standing Audit and Compensation Committees. The
Audit Committee consists of Mr. Harris and Ms. Harrison. Among other functions,
the Audit Committee makes recommendations to the Board of Directors regarding
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by the Company's independent auditors, reviews
the Company's financial statements, and reviews and evaluates the Company's
internal control functions. The Compensation Committee consists of Messrs.
Harris and Lawrence Rosen and Ms. Harrison. The Compensation Committee
administers the Company's Stock Option Plans and equity compensation plans,
determines executive compensation and makes recommendations to the Board of
Directors concerning salaries and incentive compensation for employees and
consultants of the Company.
 
                                       45
<PAGE>   48
 
COMPENSATION OF DIRECTORS
 
     Directors currently do not receive compensation for their service on the
Board of Directors or any committee thereof, although they are reimbursed for
expenses incurred in connection with their attendance at meetings of the Board
of Directors. On January 5, 1995, Mr. Diamond was granted options covering 1,666
shares having an exercise price of $1.95 per share, which was determined by the
Company to be fair market value at the time of grant, in consideration for his
services as a director of the Company. Such options were fully exercisable on
the date of grant. Directors are eligible to receive options under the Company's
1996 Stock Option Plan.
 
EXECUTIVE COMPENSATION
 
     The following table sets forth a summary of certain information regarding
compensation paid or accrued by the Company and New York N2K during 1995 to each
of the Company's and New York N2K's chief executive officer and each of the
other executive officers of the Company and New York N2K whose total annual
salary and bonus exceeded $100,000 during such period (collectively, the "Named
Executives"). The current positions of the Named Executives effective February
13, 1996 are also included in the table.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                          LONG-TERM
                                                                         COMPENSATION
                                                           ANNUAL        ------------
                                                        COMPENSATION      SECURITIES
                                                      ----------------    UNDERLYING     ALL OTHER
            NAME AND PRINCIPAL POSITION                SALARY    BONUS   OPTIONS/SARS   COMPENSATION
- ----------------------------------------------------  --------   -----   ------------   ------------
<S>                                                   <C>        <C>     <C>            <C>
Lawrence L. Rosen(1)................................        --    --             --            --
  Chairman of the Board and Chief Executive Officer
  (effective February 13, 1996); Co-Chairman (1995,
  New York N2K)
Jonathan V. Diamond (2).............................        --    --             --            --
  Vice Chairman (effective February 13, 1996); Co-
  Chairman (1995, New York N2K)
James E. Coane......................................  $155,800    --         25,000        $2,272(3)
  President and Chief Operating Officer (effective
  February 13, 1996); President and Chief Executive
  Officer (1995)
Jeffrey Magill(4)...................................  $125,000    --         16,666(5)      2,178(3)
  Vice President -- Marketing
Bruce Johnson.......................................  $109,725    --         16,666         1,975(3)
  Vice President and Chief Financial Officer
</TABLE>
 
- ---------------
 
(1) Mr. Rosen did not receive any compensation from New York N2K during fiscal
    year 1995. Effective with the Merger on February 13, 1996, Mr. Rosen entered
    into an employment agreement with the Company which provides for an annual
    base salary of $200,000 and a guaranteed bonus of $50,000 for fiscal year
    1996. See "-- Employment Agreements."
 
(2) Mr. Diamond did not receive any compensation from New York N2K during fiscal
    year 1995. Effective with the Merger on February 13, 1996, Mr. Diamond
    entered into an employment agreement with the Company which provides for an
    annual base salary of $200,000 and a guaranteed bonus of $50,000 for fiscal
    year 1996. See "-- Employment Agreements."
 
(3) Represents Company matching contributions under its 401(k) Matched Savings
    Plan.
 
(4) Mr. Magill's employment with the Company terminated on November 30, 1995.
 
(5) Mr. Magill's stock options were forfeited in connection with his termination
    of employment from the Company on November 30, 1995.
 
                                       46
<PAGE>   49
 
     Option Grants in Fiscal 1995.  The following table summarizes certain
information with respect to Company stock options granted to the Named
Executives during the fiscal year ended December 31, 1995.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                            INDIVIDUAL GRANTS(1)
                             ---------------------------------------------------
                                          PERCENT                                      POTENTIAL
                                            OF                                      REALIZABLE VALUE
                                           TOTAL                                       AT ASSUMED
                                          OPTIONS                                   ANNUAL RATES OF
                             NUMBER OF    GRANTED                                     STOCK PRICE
                             SECURITIES     TO                                      APPRECIATION FOR
                             UNDERLYING  EMPLOYEES  EXERCISE                         OPTION TERM(2)
                              OPTIONS    IN FISCAL    PRICE       EXPIRATION       ------------------
NAME                          GRANTED    YEAR 1995  PER SHARE        DATE            5%         10%
                             ----------  ---------  ---------  -----------------   -------    -------
<S>                          <C>         <C>        <C>        <C>                 <C>        <C>
Lawrence L. Rosen............       --       --          --    --                       --         --
Jonathan V. Diamond..........    1,666      0.6%      $1.95    January 5, 2005     $ 2,043    $ 5,178
James E. Coane...............   25,000      8.5%       2.40    August 10, 2005      37,733     95,625
Jeffrey Magill(3)............   16,666      7.5%       2.40    August 10, 2005      25,156     63,750
Bruce Johnson................   16,666      7.5%       2.40    August 10, 2005      25,156     63,750
</TABLE>
 
- ---------------
 
(1) All stock options reported in this table were granted pursuant to the 1987
    Employee Stock Option Plan. The options vest ratably over a four-year period
    and have a ten-year term.
 
(2) This column shows the hypothetical gains or option spreads of the options
    granted based on assumed annual compound stock appreciation rates of 5% and
    10% over the full ten-year term of the options. The assumed rates of
    appreciation are mandated by the rules of the Securities and Exchange
    Commission and do not represent the Company's estimate or projection of
    future Common Stock prices.
 
(3) Mr. Magill's options were forfeited in connection with his termination of
    employment by the Company on November 30, 1995.
 
     Option Exercises in Fiscal 1995 and Fiscal Year-End Values.  The following
table shows the number of shares covered by both exercisable and non-exercisable
stock options as of fiscal year-end, and the values for unexercised options. No
Named Executive exercised any Company stock options during 1995.
 
   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
                                     VALUES
 
<TABLE>
<CAPTION>
                                         NUMBER OF SECURITIES                VALUE OF UNEXERCISED
                                        UNDERLYING UNEXERCISED             IN-THE-MONEY OPTIONS AT
                                     OPTIONS AT DECEMBER 31, 1995            DECEMBER 31, 1995(1)
                                    ------------------------------      ------------------------------
               NAME                 EXERCISABLE     UNEXERCISABLE       EXERCISABLE     UNEXERCISABLE
- ----------------------------------- ------------    --------------      ------------    --------------
<S>                                 <C>             <C>                 <C>             <C>
Lawrence L. Rosen..................         --               --                --               --
Jonathan V. Diamond................      1,666               --            $  750               --
James E. Coane.....................    158,649           40,933             2,429           $5,625
Jeffrey Magill(2)..................     30,833               --             1,875               --
Bruce Johnson......................     54,954           30,833             2,288            5,625
</TABLE>
 
- ---------------
 
(1) Based on the difference between the fair market value of the Common Stock on
    December 31, 1995 ($2.40), and the option exercise price for each
    above-stated option. The above valuation may not reflect the actual value of
    unexercised options as the value of unexercised options will fluctuate with
    market activity.
(2) Mr. Magill's options were forfeited in connection with his termination of
    employment by the Company on November 30, 1995.
 
     Option Grants in 1996.  On February 13, 1996, options covering 1,100,264
shares having an exercise price at or above $2.40 per share, which was
determined by the Company to be fair market value at the time of grant, were
granted to employees of the Company, including Messrs. L. Rosen, Diamond,
Grusin, Coane and Johnson who were granted options covering 293,699, 293,699,
293,699, 41,666 and 16,666 shares, respectively. Such options vest ratably over
a four-year period and generally have a ten-year term.
 
                                       47
<PAGE>   50
 
EMPLOYMENT AGREEMENTS
 
     On February 13, 1996, the Company entered into employment agreements with
Lawrence L. Rosen, Jonathan V. Diamond and Robert David Grusin (the "Rosen
Employment Agreement," the "Diamond Employment Agreement" and the "Grusin
Employment Agreement", respectively) to provide for service in the capacities of
Chairman and Chief Executive Officer, Vice Chairman and Vice Chairman, and base
salaries of $200,000, $200,000 and $100,000, respectively, which salaries may be
increased as determined by the Compensation Committee of the Board of Directors.
Each of the Rosen Employment Agreement and the Diamond Employment Agreement
provides for payment of an annual bonus of not less than $50,000, until such
time as such executive's base salary is at least $250,000. The Grusin Employment
Agreement provides for an annual bonus in an amount to be determined by the
Board of Directors. In connection with the Rosen Employment Agreement, Diamond
Employment Agreement and Grusin Employment Agreement, the Company also agreed to
grant incentive stock options to each of the executives to purchase 166,666
shares of Common Stock and additional non-qualified options to purchase 127,033
shares of Common Stock at an exercise price of $2.40 per share (or such higher
exercise price as may be required under Section 422 of the Internal Revenue
Code), which vest ratably over a four-year period.
 
     Each of the Rosen Employment Agreement, Diamond Employment Agreement and
Grusin Employment Agreement is for a two-year term, but absent notice of
termination by either the Company or the executive, shall be automatically
renewed for consecutive one-year periods. If the Company terminates an
executive's employment other than for "cause" or due to "disability" or there
occurs a "change in control" (each as defined in the Rosen Employment Agreement,
the Diamond Employment Agreement and the Grusin Employment Agreement), each
executive will generally be entitled to (i) eighteen months severance, (ii) an
amount equal to his average annual bonus over the prior three years (or if
employed for less than three years, such average multiplied by 1.5) paid out
over 18 months, and (iii) the immediate vesting of any unexercised stock
options. In accordance with the Rosen Employment Agreement, Diamond Employment
Agreement and Grusin Employment Agreement, each executive has agreed not to
disclose any of the Company's confidential information and not to compete with
the Company for an eighteen-month period following termination of his term of
employment with the Company.
 
     On May 1, 1987, the Company entered into an employment agreement with Mr.
Coane (as amended, the "Coane Employment Agreement") that provides for a base
salary of $115,000 until September 30, 1987, and a base salary of $125,000
thereafter, subject to salary increases or other compensation at the discretion
of the Board of Directors. The Company also agreed to grant an option to Mr.
Coane to purchase 133,333 shares of Common Stock of the Company at an exercise
price of $3.00 per share, exercisable until May 1, 1997. Pursuant to the terms
of the Coane Employment Agreement, the executive agreed to serve as President
and Chief Executive Officer, pursuant to election or appointment to those
positions, and to perform such other duties as shall be assigned to him during
the continuance of such agreement. The Coane Employment Agreement was for an
initial term of three years, but absent notice of termination by either the
Company or the executive, the agreement shall be automatically renewed for
consecutive one-year periods. If the Company terminates the executive's
employment other than for "cause" or due to "disability" or there occurs a
"change in control" (each as defined in the Coane Employment Agreement), the
executive shall be entitled to severance for eighteen months. In accordance with
the Coane Employment Agreement, the executive has agreed not to compete with the
Company during the term of his employment or for any period during which he
receives severance pay or acts, pursuant to the agreement, as a consultant to
the Company.
 
     On February 8, 1988, the Company entered into an employment agreement with
Bruce Johnson (the "Johnson Employment Agreement") that provides for a base
salary of $75,000, participation in a bonus plan and salary increases or other
compensation at the discretion of the Board of Directors. The Company also
agreed to grant an option to Bruce Johnson to purchase 41,666 shares of Common
Stock of the Company at an exercise price of $3.75 per share, exercisable until
February 8, 1998. Pursuant to the terms of the Johnson Employment Agreement, the
executive agreed to serve as Vice President and Chief Financial Officer,
pursuant to election or appointment to those positions, and to perform such
other duties as shall be assigned to him during the continuance of such
agreement. The Johnson Employment Agreement was for an initial term of three
years, but absent notice of termination by either the Company or the executive,
the agreement shall be automatically renewed for consecutive one-year periods.
If the Company terminates the executive's employment other than for "cause" or
due to "disability," or there occurs a "change in control" (each as defined in
the Johnson Employment Agreement), the executive shall be entitled to severance
for twelve
 
                                       48
<PAGE>   51
 
months. In accordance with the terms of the Johnson Employment Agreement, the
executive has agreed not to compete with the Company during the term of his
employment or for any period during which he receives severance pay or acts,
pursuant to the agreement, as a consultant to the Company.
 
STOCK PLANS
 
     The Company has historically utilized stock option plans as an integral
component of its compensation program for directors, officers and key executive
employees of the Company. The Company believes that stock options provide
long-term incentives to such persons and encourage the ownership of the
Company's Common Stock.
 
     1987 Employee Incentive Stock Option Plan.  The Company's 1987 Employee
Incentive Stock Option Plan (the "1987 Option Plan") provided for the grant of
stock options to certain officers and key executive employees of the Company.
The options granted under the 1987 Option Plan were intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code. As of
May 31, 1996, a total of 650,833 options for Common Stock were outstanding under
the 1987 Option Plan. Any shares of Common Stock subject to an option that has
not been exercised shall remain outstanding until such option is exercised or
expires in accordance with its terms and the terms of the 1987 Option Plan.
Generally, options granted under the 1987 Option Plan vest ratably over a
four-year period on each anniversary of the date of grant. No further stock
options will be granted under the 1987 Option Plan.
 
     Under the 1987 Option Plan, options are not assignable or transferable
except by will or under the laws of descent and distribution. In the event of an
offer to acquire all or substantially all of the assets or stock of the Company,
all options granted under the 1987 Option Plan shall automatically become
immediately exercisable without regard to the provisions relating to installment
exercises or vesting periods.
 
     1996 Stock Option Plan.  The 1996 Option Plan was adopted in February 1996.
In June 1996, the Board of Directors of the Company adopted, subject to
stockholder approval, the Company's Amended and Restated 1996 Stock Option Plan
(the "1996 Option Plan"). The 1987 Option Plan and the 1996 Option Plan are
collectively referred to as the "Stock Option Plans." Under the 1996 Option
Plan, stock options may be granted to directors, executives and other key
employees of the Company and its subsidiaries. All options granted under the
1996 Option Plan are not assignable or transferable except by will or under the
laws of descent and distribution. As of May 31, 1996, a total of 1,128,598
options for Common Stock were outstanding under the 1996 Option Plan.
 
     The 1996 Option Plan is administered by the Compensation Committee of the
Board of Directors or such other committee as may be appointed by the Board.
Subject to the limitations set forth in the 1996 Option Plan, the Compensation
Committee has the sole and complete authority to select participants, grant
options to participants, impose restrictions and conditions upon each option,
modify or amend the terms of each outstanding option, reduce the exercise price
per share of unexercised options, accelerate or defer the exercise price per
share of any outstanding option and make all other determinations and take all
other actions necessary for the administration of the plan. The Compensation
Committee may amend or modify the terms of any option agreement in any manner to
the extent that it would have had the authority initially to grant an option
with such amended terms; provided that no such amendment or modification shall
impair the rights of any participant under any outstanding option without the
consent of such participant.
 
     Options granted under the 1996 Option Plan may be either incentive stock
options which are intended to satisfy the requirements of Section 422 of the
Internal Revenue Code, or options that do not qualify as incentive stock
options. Generally, options granted under the 1996 Option Plan vest ratably over
a four-year period on each anniversary of the date of grant. At the Compensation
Committee's discretion, however, options may be made exercisable at any other
time or upon the occurrence of certain events or the achievement of certain
conditions or performance goals. Options granted under the 1996 Option Plan are
exercisable for a period not to exceed ten years from the date of grant, except
that upon a participant's termination of employment for any reason, all vested
options shall expire 90 days following such termination date and any nonvested
options shall be immediately forfeited. Pursuant to the terms of the 1996 Option
Plan, the exercise price of all incentive stock options and nonqualified stock
options granted under the Plan shall not be less than the fair market value of
the Common Stock at the time of grant. In the event of a "change of control" of
the Company (as defined in the 1996 Option Plan) or the termination of a
participant's
 
                                       49
<PAGE>   52
 
employment other than for cause, death, disability or voluntary departure, the
Compensation Committee may provide that stock options previously granted shall
be immediately exercisable.
 
     The Company has authorized and reserved 2,200,000 shares of Common Stock
for issuance under the 1996 Option Plan. The shares may be unissued shares or
treasury shares. If any options that are the subject of an award are not
exercised prior to their expiration or are cancelled, terminated or forfeited
without the issuance of Common Stock thereunder, such shares will no longer be
charged against such maximum share limitation and may again be made subject to
award under the 1996 Option Plan. In the event of certain corporate
reorganizations, recapitalizations or other specified corporate transactions
affecting the Common Stock of the Company, proportionate adjustments may be made
to the number of shares available for grant and to the number of shares and
price of outstanding awards made before the event. The 1996 Option Plan has a
term of ten years, subject to earlier termination or amendment by the Board of
Directors. All awards granted under the 1996 Option Plan prior to its
termination remain outstanding until exercised, paid or terminated in accordance
with their terms. The Board of Directors may amend the 1996 Option Plan at any
time, except that shareholder approval is required for certain amendments to the
extent it is required by law, agreement or the rules of any exchange upon which
the Common Stock is listed.
 
     The grant of a stock option under the 1996 Option Plan will not generally
result in taxable income for the participant, nor in a deductible compensation
expense for the Company, at the time of grant. The participant will have no
taxable income upon exercising an incentive stock option (except that the
alternative minimum tax may apply), and the Company will receive no deduction
when an incentive stock option is exercised. Upon exercising a nonqualified
stock option, the participant will recognize ordinary income in the amount by
which the fair market value of the Common Stock on the date of exercise exceeds
the exercise price, and the Company will generally be entitled to a
corresponding deduction. The treatment of a participant's disposition of shares
of Common Stock acquired upon the exercise of an option is dependent upon the
length of time the shares have been held and on whether such shares were
acquired by exercising an incentive stock option or a nonqualified stock option.
Generally, there will be no tax consequence to the Company in connection with
the disposition of shares acquired under an option except that the Company may
be entitled to a deduction in the case of a disposition of shares acquired upon
exercise of an incentive stock option before the applicable incentive stock
option holding period has been satisfied.
 
     Stock options previously granted under the 1996 Option Plan to executive
officers and directors are described above under "-- Executive Compensation --
Option Grants in 1996." The number of shares of Common Stock that may be subject
to options granted in the future to executive officers and other officers, key
employees and directors of the Company under the 1996 Option Plan is not
determinable at this time.
 
     1996 Employee Stock Purchase Plan.  In June 1996, the Board of Directors of
the Company adopted and the stockholders of the Company approved the Company's
1996 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is
intended to satisfy the requirements of Section 423 of the Internal Revenue
Code. The Purchase Plan is administered by the Compensation Committee. Any
employee of the Company or any subsidiary designated by the Compensation
Committee who customarily works at least 20 hours per week and five months per
year is eligible to participate in the Purchase Plan after having worked for the
Company for six months. Approximately 98 employees currently are eligible to
participate in the Purchase Plan. Non-employee directors of the Company are not
eligible to participate in the Purchase Plan. Each employee eligible to
participate in the Purchase Plan will be granted an option to contribute between
one and ten percent of the employee's compensation towards the purchase of the
Company's Common Stock at a purchase price for each three-month purchase period
(a "Purchase Period") equal to the lower of (x) 85% of the fair market value of
a share of the Company's Common Stock on the first day of the Purchase Period
and (y) 85% of the fair market value of a share of the Company's Common Stock on
the last day of the Purchase Period. The amount to be contributed by a
participant will be deducted from each paycheck, held for the participant during
a Purchase Period and applied towards the purchase of the Company's Common Stock
on the last day of the Purchase Period. A participant may change the percentage
of his or her compensation to be contributed for any given purchase period prior
to the beginning of that period and may elect not to participate with respect to
one or more plan periods, but then must wait until the next calendar year before
participating again. The number of shares available for purchase under the
Purchase Plan is 1,500,000. The Board at any time may amend, suspend or
discontinue the Purchase Plan, in whole or in part.
 
                                       50
<PAGE>   53
 
                              CERTAIN TRANSACTIONS
 
SERIES D PREFERRED STOCK PURCHASE
 
     In August and September 1994, Lawrence L. Rosen and Jonathan V. Diamond and
entities affiliated with Robert C. Harris, Jr. and Susanne Harrison, directors
of the Company, purchased an aggregate of 725,000 shares of Series D Preferred
Stock which will convert upon consummation of the Offering into 743,590 shares
of Common Stock. The purchase price per share of Common Stock on an as-converted
basis was $1.95. Each of these individuals (and/or their affiliated entities)
purchased shares of Series D Preferred Stock that convert into the number of
shares of Common Stock set forth immediately following his or her name: Lawrence
L. Rosen (25,641); Jonathan V. Diamond (51,282); Robert C. Harris, Jr.
(512,821); and Susanne Harrison (153,846).
 
CONSIDERATION FOR THE MERGER; SERIES E PREFERRED STOCK
 
     In February 1996, as consideration for all of the outstanding shares of
common stock of New York N2K in the Merger, the shareholders of New York N2K
received an aggregate of 1,797,146 shares of Common Stock and 1,347,860 shares
of Series E Preferred Stock of the Company. The stockholders of New York N2K at
the time of the Merger included Lawrence L. Rosen, Jonathan V. Diamond, Robert
David Grusin and Jerold L. Rosen. Each of these individuals received the number
of shares of Common Stock and Series E Preferred Stock that will, upon
conversion of the Series E Preferred Stock, result in the number of shares of
Common Stock set forth immediately following his or her name: Lawrence L. Rosen
(521,172), (130,293); Jonathan V. Diamond (521,172), (130,293); Robert David
Grusin (521,172), (130,293); and Jerold L. Rosen (143,771), (35,943). See
"Principal Stockholders." Also in February 1996, entities affiliated with Robert
C. Harris, Jr. and Susanne Harrison, directors of the Company, and Messrs.
Diamond, Grusin, L. Rosen and J. Rosen purchased an aggregate of 3,050,000
shares of Series E Preferred Stock at a purchase price of $.80 per share. Each
of these individuals (and/or their affiliated entities) purchased the number of
shares of Series E Preferred Stock that convert into the number of shares of
Common Stock set forth immediately following his or her name: Robert C. Harris,
Jr. (172,917); Susanne Harrison (166,667); Lawrence L. Rosen (218,750); Jonathan
V. Diamond (239,583); Robert David Grusin (208,333); and Jerold Rosen (10,416).
In May 1996, Mr. Harris purchased an additional 125,000 shares of Series E
Preferred Stock, which will convert into 41,666 shares of Common Stock. The
purchase price per share of Common Stock on an as-converted basis was $2.40.
 
OPTION GRANTS TO INSIDERS
 
     The Company has granted options to purchase shares of Common Stock to
certain of its executive officers and directors. See "Management--Employment
Agreements," "-- Compensation of Directors," and "Executive
Compensation -- Option Grants in 1996."
 
PREFERRED STOCK CONVERSION
 
     Upon consummation of the Offering, 488,838 shares of the Company's Series A
Preferred Stock, par value $.001 per share (the "Series A Stock"), will convert
into 228,369 shares of Common Stock; 625,000 shares of Series B Preferred Stock,
par value $.001 per share (the "Series B Stock"), will convert into 238,095
shares of Common Stock; 2,142,857 shares of Series C Preferred Stock, par value
$.001 per share (the "Series C Stock"), will convert into 800,000 shares of
Common Stock; 800,000 shares of Series D Preferred Stock, par value $.001 per
share (the "Series D Stock"), will convert into 820,513 shares of Common Stock;
6,007,060 shares of Series E Preferred Stock, par value $.001 per share (the
"Series E Stock"), will convert into 2,002,354 shares of Common Stock; and
5,333,333 shares of Series F Preferred Stock, par value $.001 per share (the
"Series F Stock"), will convert into 1,777,777 shares of Common Stock (the
Series A Stock, the Series B Stock, the Series C Stock, the Series D Stock, the
Series E Stock and the Series F Stock are referred to collectively as the
"Preferred Stock"). The automatic conversion of the Preferred Stock is referred
to herein as the "Preferred Stock Conversion." See "Principal Stockholders."
 
                                       51
<PAGE>   54
 
EMPLOYMENT AGREEMENTS
 
     The Company has entered into employment agreements with certain of its
executive officers as described under "Management -- Employment Agreements."
 
INDEMNITY AGREEMENTS
 
     Simultaneously with the completion of the Merger, the stockholders of New
York N2K, including Lawrence L. Rosen, Jonathan V. Diamond, Robert David Grusin
and Jerold R. Rosen (collectively, the "New York N2K Stockholders"), entered
into an indemnification agreement with the Company (the "Indemnification
Agreement"). The Indemnification Agreement provides for indemnification by the
New York N2K Stockholders and by the Company against certain liabilities,
losses, claims, damages or expenses arising from or in connection with (i) the
breach of any warranty, the misstatement of any representation or the failure to
fulfill any covenant or agreement made by New York N2K in the Merger Agreement
dated as of January 31, 1996 (the "Merger Agreement" ) between Old N2K and New
York N2K, or in any document furnished by New York N2K or any representative
thereof in connection with the Merger Agreement or the transactions contemplated
therein; (ii) any and all claims, suits, actions or proceedings for brokerage or
other commissions in connection with the Merger Agreement or the transactions
contemplated thereby; and (iii) any and all actions, suits, proceedings, claims,
demands, assessments, judgments, costs and expenses incident to any of the
foregoing. Pursuant to the Indemnification Agreement, all indemnification by the
New York N2K Stockholders shall be effected solely by return to the Company of
all or a portion of an aggregate of 416,666 escrowed shares of Common Stock at a
value of $2.40 per share and all indemnification by the Company shall be
effected by the issuance by the Company to the applicable New York N2K
Stockholders of up to an aggregate of 416,666 shares of Common Stock at a value
of $2.40 per share, in proportion to each New York N2K Stockholder's ownership
interest in the Company at the time of the Merger. The Indemnification Agreement
will terminate upon the consummation of the Offering.
 
     Upon the completion of the Offering, the Company will enter into
Indemnification Agreements with each of its directors and executive officers
whereby the Company will agree, subject to certain limitations, to indemnify and
hold harmless each director and executive officer from liabilities incurred as a
result of such person's status as a director of the Company. See
"Management -- Limitations on Directors' Liability -- Indemnification
Agreements."
 
FUTURE INTERESTED TRANSACTIONS
 
     The Board of Directors has adopted a policy, which will be effective
simultaneously with the completion of the Offering, to provide that future
transactions between the Company and its officers, directors and other
affiliates must (i) be approved by a majority of the members of the Board of
Directors and by a majority of the disinterested members of the Board of
Directors, (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and (iii) be for bona fide business
purposes only.
 
                                       52
<PAGE>   55
 
                             PRINCIPAL STOCKHOLDERS
 
     The table below sets forth at June 21, 1996, certain information prior to
and after the Offering regarding beneficial ownership of Common Stock held by
(i) each director and each of the Named Executives who own shares of Common
Stock, (ii) all directors and executive officers of the Company as a group and
(iii) each person known by the Company to own beneficially more than 5% of the
Common Stock. Each individual or entity named has sole investment and voting
power with respect to shares of Common Stock beneficially owned by them, except
where otherwise noted.
 
<TABLE>
<CAPTION>
                                                                        PERCENTAGE BENEFICIALLY
                                                                               OWNED(1)
                                                        SHARES        ---------------------------
                                                       BENEFICIALLY   BEFORE THE       AFTER THE
                                                         OWNED         OFFERING         OFFERING
                                                       ---------      -----------      ----------
<S>                                                    <C>            <C>              <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Jonathan V. Diamond(2)................................   995,173          10.1
Lawrence L. Rosen(3)..................................   885,439           9.0
Robert David Grusin...................................   859,798           8.8
Susanne Harrison(4)...................................   780,757           7.9
Robert C. Harris, Jr.(5)..............................   744,070           7.6
Jerold Rosen..........................................   190,131           1.9
James E. Coane(6).....................................   186,383           1.9
Daniel E. Meyer.......................................   137,472           1.4
Bruce Johnson(7)......................................    67,654             *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (9
  PERSONS):........................................... 4,846,877          49.3
OTHER PRINCIPAL STOCKHOLDERS:
Poly Ventures II, Limited Partnership(4)..............   779,090           7.9
     901 Route 110
     Farmingdale, NY 11735
Unterberg Harris Interactive Media
  Limited Partnership, CV(5)..........................   664,904           6.8
     Swiss Bank Tower
     10 East 50th Street, 22nd Floor
     New York, NY 10022
</TABLE>
 
- ---------------
* Indicates beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
 
(1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule
    13d-3(d), shares not outstanding which are subject to options, warrants,
    rights or conversion privileges exercisable within 60 days are deemed
    outstanding for the purpose of calculating the number and percentage owned
    by such person, but not deemed outstanding for the purpose of calculating
    the percentage owned by any other person listed. As of June 21, 1996, the
    Company had 9,821,711 shares of Common Stock outstanding.
 
(2) Represents 993,507 shares of Common Stock and exercisable options to
    purchase 1,666 shares of Common Stock.
 
(3) Represents 635,439 shares of Common Stock and 250,000 shares of Common Stock
    held by the Lawrence L. Rosen Family Trust, with respect to which Mr. Rosen
    has voting power.
 
(4) Represents exercisable options for 1,666 shares of Common Stock and 779,090
    shares of Common Stock owned by Poly Ventures II, Limited Partnership of
    which Ms. Harrison is a general partner. Ms. Harrison disclaims beneficial
    ownership of shares owned by Poly Ventures II, Limited Partnership .
 
(5) Represents 79,166 shares of Common Stock and 664,904 shares of Common Stock
    held by Unterberg Harris Interactive Media Limited Partnership, CV. Mr.
    Harris is a Managing Director of Unterberg Harris. Mr. Harris disclaims
    beneficial ownership of shares owned by Unterberg Harris Interactive Media
    Limited Partnership, CV.
 
(6) Represents 27,733 shares of Common Stock and exercisable options to purchase
    158,649 shares of Common Stock.
 
(7) Represents 12,700 shares of Common Stock and an exercisable option to
    purchase 54,954 shares of Common Stock.
 
                                       53
<PAGE>   56
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The following summarizes certain provisions of the Certificate of
Incorporation and Bylaws. Such summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Certificate of Incorporation and the Bylaws, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
 
GENERAL
 
     Effective upon the closing of the Offering, the authorized capital stock of
the Company will be comprised of 100,000,000 shares of Common Stock and
20,000,000 shares of Preferred Stock.
 
COMMON STOCK
 
     Following the Offering, 12,421,711 shares of Common Stock will be
outstanding. All of the issued and outstanding shares of Common Stock are, and
upon the completion of the Offering the shares of Common Stock offered hereby
will be, fully paid and non-assessable. Each holder of shares of Common Stock is
entitled to one vote per share on all matters to be voted on by stockholders
generally, including the election of directors. There are no cumulative voting
rights. The holders of Common Stock are entitled to dividends and other
distributions as may be declared from time to time by the Board of Directors out
of funds legally available therefor, if any. See "Dividend Policy." Upon the
liquidation, dissolution or winding up of the Company, the holders of shares of
Common Stock would be entitled to share ratably in the distribution of all of
the Company's assets remaining available for distribution after satisfaction of
all its liabilities and the payment of the liquidation preference of any
outstanding Preferred Stock as described below. The holders of Common Stock have
no preemptive or other subscription rights to purchase shares of stock of the
Company, nor are such holders entitled to the benefits of any redemption or
sinking fund provisions. As of June 21, 1996, there were approximately 220
beneficial owners of Common Stock.
 
PREFERRED STOCK
 
     The Certificate of Incorporation authorizes the Board of Directors to
create and issue one or more series of Preferred Stock and determine the rights
and preferences of each series, to the extent permitted by the Certificate of
Incorporation and applicable law. Among other rights, the Board of Directors may
determine, without the further vote or action by the Company's stockholders, (i)
the number of shares constituting the series and the distinctive designation of
the series; (b) the dividend rate on the shares of the series, whether dividends
will be cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series; (iii)
whether the series shall have voting rights, in addition to the voting rights
provided by law and, if so, the terms of such voting rights; (iv) whether the
series shall have conversion privileges, and, if so, the terms and conditions of
such conversion, including provision for adjustment of the conversion rate in
such events as the Board of Directors shall determine; (v) whether or not the
shares of that series shall be redeemable or exchangeable, and, if so, the terms
and conditions of such redemption or exchange, as the case may be, including the
date or dates upon or after which they shall be redeemable or exchangeable, as
the case may be, and the amount per share payable in case of redemption, which
amount may vary under different conditions and at different redemption dates;
(vi) whether the series shall have a sinking fund, for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund and (vii) the rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the Company
and the relative rights or priority, if any, of payment of shares of the series.
Except for any difference so provided by the Board of Directors, the shares of
all series of Preferred Stock will rank on a parity with respect to the payment
of dividends and to the distribution of assets upon liquidation. Although the
Company has no present plans to issue any shares of Preferred Stock following
the consummation of the Offering, the issuance of shares of Preferred Stock, or
the issuance of rights to purchase such shares, may have the effect of delaying,
deferring or preventing a change of control of the Company or an unsolicited
acquisition proposal. See "Risk Factors -- Anti-Takeover Provisions."
 
                                       54
<PAGE>   57
 
REGISTRATION RIGHTS
 
     The holders of an aggregate of 5,688,735 shares of the Common Stock to be
outstanding upon the consummation of the Offering (collectively, the
"Registration Rights Holders") have been granted by the Company certain demand
and incidental registration rights. In general, the Registration Rights Holders
have the right at any time after 180 days from the effective date of the
Registration Statement of which this Prospectus forms a part until the time that
the Company shall have qualified for the use of Form S-2 or S-3, on one
occasion, to cause the Company to register their holdings of Common Stock under
the Securities Act (such right being referred to as a "demand registration
right"). The Registration Rights Holders are also entitled, if the Company
determines to file a registration statement covering any of its securities under
the Securities Act (with the exception of an offering pursuant to a registration
statement on Form S-8 or S-4 and, in the case of Registration Rights Holders
holding the Series F Stock, an initial public offering by the Company) to
require the Company to use its best efforts to include a requested amount of
their shares of Common Stock in the Company's registered offering (such right
being referred to as an "incidental registration right"), subject to reduction
if the managing underwriter for the offering determines that the inclusion of
such shares would interfere with the successful marketing of the offering.
Furthermore, at such time as the Company shall have qualified for the use of
Form S-2 or S-3, the Registration Rights Holders, and their permitted
transferees, have the right to make one demand registration request annually,
subject to certain marketing restrictions.
 
     The Company is required to bear all registration expenses (other than
underwriting discounts and commissions and fees, and certain fees and
disbursements of counsel of the Registration Rights Holders) and has agreed to
indemnify the Registration Rights Holders against, and provide contribution with
respect to, certain liabilities under the Securities Act in connection with
incidental and demand registrations. The Registration Rights Holders have agreed
not to exercise their demand registration rights for a period of 180 days after
the date of this Prospectus. The Company is seeking the consent of the
Registration Rights Holders to delay the effectiveness of any demand
registration statement until the expiration of the 270-day period after the date
of this Prospectus, to the extent requested by the Representatives.
 
WARRANT AND OPTION ISSUANCES
 
     As of June 21, 1996, there were warrants outstanding to purchase an
aggregate of 135,555 shares of Common Stock at an average exercise price of
$6.57 per share, expiring at various dates ending on June 10, 2003, and options
to purchase an aggregate of 1,880,952 shares of Common Stock at an average
exercise price of $2.47 per share, expiring at various dates ending on April 1,
2006.
 
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
 
     Section 203 of the Delaware GCL contains certain provisions that may make
more difficult the acquisition of control of the Company by means of a tender
offer, open market purchase, a proxy fight or otherwise. These provisions are
designed to encourage persons seeking to acquire control of the Company to
negotiate with the Board of Directors. However, these provisions could have the
effect of discouraging a prospective acquiror from making a tender offer or
otherwise attempting to obtain control of the Company. To the extent that these
provisions discourage takeover attempts, they could deprive stockholders of
opportunities to realize takeover premiums for their shares or could depress the
market price of the Common Stock.
 
     Set forth below is a description of the relevant provisions of Section 203
of the Delaware GCL. The description is intended as a summary only and is
qualified in its entirety by reference to Section 203 of the Delaware GCL.
 
     Section 203 of the Delaware GCL (the "Delaware Statute") prohibits certain
"business combination" transactions between a publicly held Delaware
corporation, such as the Company after this offering, and any "interested
stockholder" for a period of three years after the date on which the latter
became an interested stockholder, unless (i) prior to that date either the
proposed business combination or the proposed acquisition of stock resulting in
its becoming an interested stockholder is approved by the Board of Directors,
(ii) in the same transaction in which it becomes an interested stockholder, the
interested stockholder acquires at least
 
                                       55
<PAGE>   58
 
85% of those shares of the voting stock of the corporation which are not held by
the directors, officers or certain employee stock plans or (iii) the business
combination with the interested stockholder is approved by the Board of
Directors and also approved at a stockholders' meeting by the affirmative vote
of the holders of at least two-thirds of the outstanding shares of the
corporation's voting stock other than shares held by the interested stockholder.
 
NASDAQ NATIONAL MARKET LISTING
 
     The Company intends to apply for listing of the Common Stock on the Nasdaq
National Market under the trading symbol "NTKI."
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the Common Stock is
                              .
 
                                       56
<PAGE>   59
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Immediately following the Offering, there will be 12,421,711 shares of
Common Stock issued and outstanding (assuming the Underwriters' over-allotment
option is not exercised). Of such shares, the 2,600,000 shares of Common Stock
to be sold in the Offering will be immediately eligible for sale in the public
market, except for any of such shares owned at any time by an "affiliate" of the
Company within the meaning of Rule 144 under the Securities Act. The remaining
9,761,989 issued and outstanding shares are "restricted securities" within the
meaning of Rule 144 and may not be publicly resold, except in compliance with
the registration requirements of the Securities Act or pursuant to an exemption
from registration, including that provided by Rule 144.
 
     In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least two years, including persons who may be deemed affiliates of the
Company, is entitled to sell within any three-month period a number of shares of
Common Stock that does not exceed the greater of 1% of the then-outstanding
shares of Common Stock of the Company, or the average weekly trading volume of
Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are subject to certain restrictions relating to manner of
sale, notice and the availability of current public information about the
Company. A person who is not an "affiliate" of the Company at any time during
the 90 days preceding a sale, and who has beneficially owned shares for at least
three years, would be entitled to sell such shares immediately following the
Offering under Rule 144(k) without regard to the volume limitations, manner of
sale provisions or notice or other requirements of Rule 144. In addition, any
employee, director or officer of, or consultant to, the Company who purchased
his shares pursuant to a written compensatory plan or contract may be entitled
to rely on the resale provisions of Rule 701, which permits non-affiliates to
sell their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144, and permits
affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus.
 
     The directors and executive officers of the Company and certain other
stockholders of the Company, who collectively hold        of the outstanding
shares of Common Stock, have agreed not to, directly or indirectly, offer, sell,
assign, transfer, encumber, pledge, contract to sell, grant an option to
purchase or otherwise dispose of any Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Cowen &
Company. Certain stockholders of the Company are entitled to both demand and
incidental registration rights with respect to 5,629,013 shares of Common Stock.
The Company is seeking the consent of the Registration Rights Holders, who
possess demand registration rights at any time 180 days after the date of this
Prospectus, to delay the effectiveness of any demand registration statement
until the expiration of the 270-day period after the date of this Prospectus, to
the extent requested by the Representatives. After the expiration of the 180-day
period (or 270-day period, as applicable), such holders may choose to exercise
their demand registration rights, which could result in a large number of shares
being sold in the public market. See "Description of Capital
Stock -- Registration Rights" and "Underwriting."
 
     The Company intends to file immediately following the Offering registration
statements on Form S-8 under the Securities Act to register an aggregate of
2,952,354 shares of Common Stock reserved for issuance pursuant to the exercise
of stock options granted under the Stock Option Plans and 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Purchase Plan. The stock
registered under such registration statements will thereafter be available for
sale in the public market upon vesting of such options, subject to the resale
limitations of Rule 144 applicable to "affiliates" of the Company. See
"Management -- Stock Plans."
 
     Prior to the date of this Prospectus, there has been no public market for
the Common Stock. Trading of the Common Stock on the Nasdaq National Market is
expected to commence following the completion of the Offering. No prediction can
be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. See "Risk
Factors -- Share Eligible for Future Sale; Registration Rights."
 
                                       57
<PAGE>   60
 
                                  UNDERWRITING
 
     Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Cowen & Company,
Oppenheimer & Co., Inc. and Unterberg Harris are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of Shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
 
<TABLE>
<CAPTION>
                                                                         NUMBER OF
                                                                         SHARES OF
                                UNDERWRITER                            COMMON STOCK
        ------------------------------------------------------------   -------------
        <S>                                                            <C>
        Cowen & Company.............................................
        Oppenheimer & Co., Inc......................................
        Unterberg Harris............................................
 
                                                                       -------------
                  Total.............................................
                                                                       ==============
</TABLE>
 
     The Underwriters propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less a
concession of $               per share. The Underwriters may allow, and such
dealers may allow a concession not in excess of $          per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Representatives. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any are taken.
 
     The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 390,000
additional shares at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
above table bears to 2,600,000 and the Company will be obligated, pursuant to
the option, to sell such shares to the Underwriters. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby. If purchased, the Underwriters will offer
such additional shares on the same terms as those on which the shares are being
offered.
 
     The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
 
     The officers, directors and certain stockholders of the Company, holding in
the aggregate           shares of the outstanding Common Stock, have agreed not
to, directly or indirectly, offer, sell, contract to sell, assign,
 
                                       58
<PAGE>   61
 
transfer, encumber, pledge, contract to sell, grant an option to purchase or
otherwise dispose of any Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of Cowen & Company. The
Company has also agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or any rights to acquire Common
Stock (other than the grant of options pursuant to the Company's 1996 Stock
Option Plan and shares issuable upon exercise of outstanding options and
warrants) for a period of 180 days after the date of this Prospectus, without
the prior written consent of Cowen & Company, subject to certain limited
exceptions. See "Shares Eligible for Future Sale."
 
     The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
 
     Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations are prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and stages of development
of other companies which the Company and the Representatives of the Underwriters
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors,
if any, deemed relevant.
 
     Affiliates of Unterberg Harris are stockholders of the Company and Robert
C. Harris, Jr., a co-founder and a Managing Director of Unterberg Harris, is a
director and stockholder of the Company. See "Management", "Certain
Transactions" and "Principal Stockholders." Unterberg Harris acted as financial
advisor to Telebase in connection with the Merger, for which it received a
warrant to purchase 50,000 shares of Common Stock at an exercise price of $2.40
per share as compensation.
 
                                 LEGAL MATTERS
 
     Certain legal matters with respect to the legality of the Common Stock
offered hereby will be passed upon for the Company by Dewey Ballantine, 1301
Avenue of the Americas, New York, New York 10019. O'Sullivan Graev & Karabell,
LLP, 30 Rockefeller Plaza, New York, New York 10112, has acted as counsel for
the Underwriters in connection with the Offering.
 
                                    EXPERTS
 
     The audited consolidated financial statements of the Company as of December
31, 1994 and 1995 and March 31, 1996, and for each of the years in the
three-year period ended December 31, 1995, and the three months ended March 31,
1996, included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report. The
audited financial statements of N2K Inc., a New York corporation, as of December
31, 1995 included in this Registration Statement have been audited by Richard A.
Eisner & Company, LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
 
                                       59
<PAGE>   62
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to the
shares of Common Stock offered hereby. For the purposes hereof, the term
"Registration Statement" means the original Registration Statementand any and
all amendments thereto. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and such Common Stock,
reference is hereby made to such Registration Statement, which can be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Regional Offices of the Commission at Seven World Trade Center, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material also can be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed
rates.
 
     Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
 
     The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing updated summary financial information for each of
the first three quarters of each fiscal year.
 
                                       60
<PAGE>   63
 
                            N2K INC. AND SUBSIDIARY
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                       -----
<S>                                                                                    <C>
FINANCIAL STATEMENTS OF N2K INC. AND SUBSIDIARY
Report of Independent Public Accountants.............................................  F-2
Consolidated Balance Sheets..........................................................  F-3
Consolidated Statements of Operations................................................  F-4
Consolidated Statements of Stockholders' Equity......................................  F-5
Consolidated Statements of Cash Flows................................................  F-6
Notes to Consolidated Financial Statements...........................................  F-7
FINANCIAL STATEMENTS OF NEW YORK N2K
Independent Auditors' Report.........................................................  F-18
Balance Sheet........................................................................  F-19
Statement of Operations..............................................................  F-20
Statement of Stockholders' Equity....................................................  F-21
Statement of Cash Flows..............................................................  F-22
Notes to Financial Statements........................................................  F-23
</TABLE>
 
                                       F-1
<PAGE>   64
 
     After the one-for-three reverse stock split of each outstanding share of
Common stock and the reorganization of the Company as a Delaware corporation as
discussed in Note 1 to the Consolidated Financial Statements is effected, we
expect to be in a position to render the following audit report.
 
                                          /s/  ARTHUR ANDERSEN LLP
 
Philadelphia, Pa.
June 21, 1996
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To N2K Inc.
 
     We have audited the accompanying consolidated balance sheets of N2K Inc. (a
Delaware corporation) and subsidiary as of December 31, 1994 and 1995 and March
31, 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995 and the three months ended March 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of N2K Inc. and subsidiary as
of December 31, 1994 and 1995 and March 31, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 and the three months ended March 31, 1996, in conformity with
generally accepted accounting principles.
 
                                       F-2
<PAGE>   65
 
                            N2K INC. AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                   ---------------------------      MARCH 31,
                                                                      1994            1995             1996
                                                                   -----------     -----------     ------------       PRO FORMA
                                                                                                                    STOCKHOLDERS'
                                                                                                                       EQUITY
                                                                                                                    -------------
                                                                                                                     (UNAUDITED)
<S>                                                                <C>             <C>             <C>              <C>
                                                             ASSETS
CURRENT ASSETS:
  Cash and cash equivalents......................................  $ 1,469,764     $   547,624     $  1,484,697
  Restricted cash................................................      500,000         500,000          500,000
  Accounts receivable, net of allowance for doubtful accounts of
    $49,073,
    $42,944 and $56,426..........................................    1,984,388       1,498,549        1,655,447
  Prepaid expenses...............................................       71,417         101,642          190,075
                                                                   -----------     -----------     ------------
    Total current assets.........................................    4,025,569       2,647,815        3,830,219
                                                                   -----------     -----------     ------------
PROPERTY AND EQUIPMENT:
  Computer equipment.............................................    1,427,318       1,717,416        1,473,162
  Office furniture and equipment.................................       99,636         141,895          163,515
  Leasehold improvements.........................................       63,170          69,534          135,376
  Property and equipment under capital leases....................      489,953         649,052        1,018,686
                                                                   -----------     -----------     ------------
                                                                     2,080,077       2,577,897        2,790,739
  Less -- Accumulated depreciation and amortization..............   (1,518,194)     (1,756,752)      (1,312,883)
                                                                   -----------     -----------     ------------
    Net property and equipment...................................      561,883         821,145        1,477,856
                                                                   -----------     -----------     ------------
OTHER ASSETS:
  Restricted cash................................................      167,000         167,000          167,000
  Goodwill, net..................................................           --              --          273,000
  Other..........................................................       22,471          22,700           58,670
                                                                   -----------     -----------     ------------
    Total other assets...........................................      189,471         189,700          498,670
                                                                   -----------     -----------     ------------
                                                                   $ 4,776,923     $ 3,658,660     $  5,806,745
                                                                   ===========     ===========     ============
                                              LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Line of credit.................................................  $        --     $   400,000     $         --
  Current portion of capital lease obligations...................       96,747          63,504          179,053
  Accounts payable...............................................      418,935         387,984          779,902
  Accrued vendor.................................................    1,047,087       1,061,200        1,143,893
  Accrued compensation...........................................      187,116         231,451          185,596
  Other accrued liabilities......................................      389,535         412,884          412,892
  Deferred revenues..............................................       73,933          70,592           58,750
                                                                   -----------     -----------     ------------
    Total current liabilities....................................    2,213,353       2,627,615        2,760,086
                                                                   -----------     -----------     ------------
LONG-TERM LIABILITIES:
  Capital lease obligations......................................       66,387         149,253          362,525
  Other..........................................................      253,479         232,808          267,796
                                                                   -----------     -----------     ------------
    Total long-term liabilities..................................      319,866         382,061          630,321
                                                                   -----------     -----------     ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
  Preferred stock $.001 par value, 20,000,000 shares authorized,
    4,056,695, 4,056,695 and 9,154,555 issued and outstanding;
    none issued and outstanding pro forma........................        4,057           4,057            9,155     $         --
  Common stock, $.001 par value, 100,000,000 shares authorized,
    2,089,286, 2,089,319 and 3,886,548 shares issued and
    outstanding; 7,672,812 shares issued and outstanding pro
    forma........................................................        2,089           2,089            3,887            7,673
  Additional paid-in capital.....................................    8,539,175       8,539,255       15,683,925       15,689,294
  Accumulated deficit............................................   (6,301,617)     (7,896,417)     (13,280,629)     (13,280,629 )
                                                                   -----------     -----------     ------------     ------------
    Total stockholders' equity...................................    2,243,704         648,984        2,416,338     $  2,416,338
                                                                                                                    ============
                                                                   -----------     -----------     ------------
                                                                   $ 4,776,923     $ 3,658,660     $  5,806,745
                                                                   ===========     ===========     ============
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       F-3
<PAGE>   66
 
                            N2K INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                              YEAR ENDED                          THREE MONTHS
                                             DECEMBER 31,                        ENDED MARCH 31,
                               -----------------------------------------    -------------------------
                                  1993           1994           1995                         1996
                               -----------    -----------    -----------       1995       -----------
                                                                            ----------
                                                                            (UNAUDITED)
<S>                            <C>            <C>            <C>            <C>           <C>
Revenues:
  Entertainment............... $        --    $        --    $    96,505    $       --    $   216,800
  Information services........  10,360,257     11,391,780     10,976,711     3,204,151      2,514,382
                               -----------    -----------    -----------    ----------    -----------
                                10,360,257     11,391,780     11,073,216     3,204,151      2,731,182
                               -----------    -----------    -----------    ----------    -----------
Cost of revenues:
  Entertainment...............          --             --         85,176            --        213,003
  Information services........   5,747,293      6,558,541      6,489,472     1,863,647      1,591,641
                               -----------    -----------    -----------    ----------    -----------
                                 5,747,293      6,558,541      6,574,648     1,863,647      1,804,644
                               -----------    -----------    -----------    ----------    -----------
          Gross profit........   4,612,964      4,833,239      4,498,568     1,340,504        926,538
                               -----------    -----------    -----------    ----------    -----------
Operating expenses:
  Operating and development...   1,350,057      1,777,654      2,267,852       536,721      1,247,573
  Sales and marketing.........   1,213,829      1,364,198      2,575,618       501,172        430,993
  General and
     administrative...........   1,471,150      1,564,658      1,337,731       343,241        507,255
  Charge for purchased
     research and
     development..............          --             --             --            --      4,133,281
                               -----------    -----------    -----------    ----------    -----------
          Operating income
            (loss)............     577,928        126,729     (1,682,633)      (40,630)    (5,392,564)
Interest income...............      43,761         73,359        106,370        27,683         24,904
Interest expense..............     (82,890)       (48,398)       (18,237)       (3,544)       (16,552)
                               -----------    -----------    -----------    ----------    -----------
          Income (loss) before
            income taxes......     538,799        151,690     (1,594,500)      (16,491)    (5,384,212)
Income taxes..................      33,913          9,280            300           663             --
                               -----------    -----------    -----------    ----------    -----------
Net income (loss)............. $   504,886    $   142,410    $(1,594,800)   $  (17,154)   $(5,384,212)
                               ===========    ===========    ===========    ==========    ===========
Pro forma net loss per common
  share (unaudited)...........                               $     (0.15)                 $     (0.49)
                                                             ===========                  ===========
Shares used in computing pro
  forma net loss per common
  share (unaudited)...........                                10,939,989                   10,925,422
                                                             ===========                  ===========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       F-4
<PAGE>   67
 
                            N2K INC. AND SUBSIDIARY
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                           ADDITIONAL
                                    PREFERRED    COMMON      PAID-IN      ACCUMULATED
                                      STOCK      STOCK       CAPITAL        DEFICIT          TOTAL
                                    ---------    ------    -----------    ------------    -----------
<S>                                 <C>          <C>       <C>            <C>             <C>
BALANCE, DECEMBER 31, 1992........   $ 3,257     $2,089    $ 6,980,811    $ (6,948,913)   $    37,244
  Net income......................        --        --              --         504,886        504,886
                                      ------     ------     ----------     -----------    -----------
BALANCE, DECEMBER 31, 1993........     3,257     2,089       6,980,811      (6,444,027)       542,130
  Issuance of Series D Preferred
     stock, net...................       800        --       1,558,284              --      1,559,084
  Common stock options
     exercised....................        --        --              80              --             80
  Net income......................        --        --              --         142,410        142,410
                                      ------     ------     ----------     -----------    -----------
BALANCE, DECEMBER 31, 1994........     4,057     2,089       8,539,175      (6,301,617)     2,243,704
  Common stock options
     exercised....................        --        --              80              --             80
  Net loss........................        --        --              --      (1,594,800)    (1,594,800)
                                      ------     ------     ----------     -----------    -----------
BALANCE, DECEMBER 31, 1995........     4,057     2,089       8,539,255      (7,896,417)       648,984
  Issuance of Common stock and
     Series E Preferred stock in
     connection with purchase of
     N2K Inc......................     1,348     1,798       4,148,258              --      4,151,404
  Issuance of Series E Preferred
     stock........................     3,750        --       2,996,250              --      3,000,000
  Common stock options
     exercised....................        --        --             162              --            162
  Net loss........................        --        --              --      (5,384,212)    (5,384,212)
                                      ------     ------     ----------     -----------    -----------
BALANCE, MARCH 31, 1996...........   $ 9,155     $3,887    $15,683,925    $(13,280,629)   $ 2,416,338
                                      ======     ======     ==========     ===========    ===========
PRO FORMA BALANCE AFTER CONVERSION
  OF PREFERRED STOCK INTO COMMON
  STOCK (Note 1) (unaudited)......   $    --     $7,673    $15,689,294    $(13,280,629)   $ 2,416,338
                                      ======     ======     ==========     ===========    ===========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       F-5
<PAGE>   68
 
                            N2K INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                               YEAR ENDED                     THREE MONTHS ENDED
                                              DECEMBER 31,                         MARCH 31,
                                 --------------------------------------    -------------------------
                                   1993          1994          1995           1995          1996
                                 ---------    ----------    -----------    ----------    -----------
                                                            (UNAUDITED)
<S>                              <C>          <C>           <C>            <C>           <C>
OPERATING ACTIVITIES:
  Net income (loss)............. $ 504,886    $  142,410    $(1,594,800)   $  (17,154)   $(5,384,212)
  Adjustments to reconcile net
     income (loss) to net cash
     provided by (used in)
     operating activities --
     Depreciation and
       amortization.............   269,530       290,653        238,558        69,712        118,382
     Provision for doubtful accounts...    18,000     18,000          --           --          4,500
     Charge for purchased
       research and
       development..............        --            --             --            --      4,133,281
     Decrease (increase) in --
          Accounts receivable...  (137,348)     (202,463)       485,839      (495,506)       (83,308)
          Prepaid expenses......    35,237       (26,343)       (30,225)        6,077        (84,893)
          Other assets..........    14,191         7,367           (229)          187            642
     Increase (decrease) in --
          Accounts payable......  (120,905)       89,793        (30,951)     (245,811)       391,918
          Accrued vendor........   529,664      (460,180)        14,113       241,250         82,693
          Accrued
            compensation........    23,498        43,025         44,335       (52,490)       (45,855)
          Other accrued
            liabilities.........  (124,840)       30,897         23,349       263,399       (387,891)
          Deferred revenues.....  (116,383)      (28,665)        (3,341)      (28,000)       (11,842)
          Other long-term
            liabilities.........   (26,969)          (47)       (20,671)       (5,089)        17,769
                                 ---------     ---------    -----------     ---------    -----------
     Net cash provided by (used
       in) operating
       activities...............   868,561       (95,553)      (874,023)     (263,425)    (1,248,816)
                                 ---------     ---------    -----------     ---------    -----------
INVESTING ACTIVITIES:
  Purchases of property and
     equipment..................  (128,495)     (255,847)      (338,721)      (64,786)      (167,625)
  Acquisition of N2K Inc., net
     of cash acquired...........        --            --             --            --       (224,077)
                                 ---------     ---------    -----------     ---------    -----------
     Net cash used in investing
       activities...............  (128,495)     (255,847)      (338,721)      (64,786)      (391,702)
                                 ---------     ---------    -----------     ---------    -----------
FINANCING ACTIVITIES:
  Net borrowings (repayments)
     under line of credit....... $(100,000)   $ (400,000)   $   400,000    $       --    $  (400,000)
  Payments on capital lease
     obligations................  (102,807)     (117,959)      (109,476)      (29,164)       (22,571)
  Payment on subordinated
     note.......................  (150,000)      (75,000)            --            --             --
  Proceeds from issuance of
     Preferred stock, net.......        --     1,559,084             --            --      3,000,000
  Proceeds from exercise of
     common stock options.......        --            80             80            80            162
                                 ---------     ---------    -----------     ---------    -----------
     Net cash provided by (used
       in) financing
       activities...............  (352,807)      966,205        290,604       (29,084)     2,577,591
                                 ---------     ---------    -----------     ---------    -----------
INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS..............   387,259       614,805       (922,140)     (357,295)       937,073
CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD...........   467,700       854,959      1,469,764     1,469,764        547,624
                                 ---------     ---------    -----------     ---------    -----------
CASH AND CASH EQUIVALENTS, END
  OF PERIOD..................... $ 854,959    $1,469,764    $   547,624    $1,112,469    $ 1,484,697
                                 =========     =========    ===========     =========    ===========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       F-6
<PAGE>   69
 
                            N2K INC. AND SUBSIDIARY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (INFORMATION FOR THE THREE MONTHS ENDED
                          MARCH 31, 1995 IS UNAUDITED)
 
1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
THE COMPANY
 
  Background
 
     N2K Inc. (formerly Telebase Systems, Inc.) (the Company or N2K) was formed
as a result of the merger in February 1996, of N2K Inc., which was founded in
1995 as a developer of online music entertainment content and Telebase Systems,
Inc. (Telebase), which was founded in 1984 as a provider of online content and
information retrieval services (see Note 2). In 1995, recognizing increasing
opportunities in the consumer entertainment market, Telebase expanded its online
strategy to include music entertainment.
 
     The Company is a music entertainment company focused on providing original
content, interactive programming and recorded music using the Internet as a new
global marketing, promotion and distribution medium. By combining its music
industry and technical expertise, N2K has created an interactive, entertaining
and content-rich online environment, which includes its award-winning
merchandising website, Music Boulevard, music genre websites, Jazz Central
Station and Rocktropolis, and individual artist sites for such artists as David
Bowie and the Rolling Stones. These websites provide a comprehensive
entertainment and information resource enabling users to search and sample music
and artist information interactively through sound, video and graphics. Each of
the music genre and individual artist websites features a hotlink directly with
Music Boulevard to facilitate purchases of CDs, cassettes and related
merchandise. The Company plans to introduce its own recorded music label, N2K
Encoded Music, with its first release scheduled for October 1996. N2K Encoded
Music CDs will be enhanced with multimedia capabilities and will be marketed and
sold through the Company's Internet websites as well as through traditional
retail and other distribution channels.
 
     To date, the Company has derived its revenues primarily from its online
business information and gateway retrieval services. The Company recently
shifted the focus of its business to music entertainment delivered via the
Internet and expects to derive an increasingly larger portion of its revenues
from the music entertainment business, including the planned N2K Encoded Music
label and the sales of advertising on its music-related websites. Due to the
Company's recent shift in business focus, the Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new, unproven and rapidly evolving markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
employees, continue to upgrade its technologies and commercialize its products
and services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks. If the Company is not
successful in developing and expanding its music entertainment business,
including the planned N2K Encoded Music label and the sales of advertising on
its music-related websites, the Company's ability to achieve profitability would
be materially adversely affected.
 
  Unaudited Pro Forma Stockholders' Equity
 
     In conjunction with the proposed initial public offering of the Company's
Common stock (the Offering), all of the outstanding shares of the Series A,
Series B, Series C, Series D and Series E Preferred stock will convert into
Common stock upon the consummation of the Offering. The unaudited pro forma
stockholders' equity at March 31, 1996 reflects the assumed conversion of the
Series A, Series B, Series C, Series D and Series E Preferred stock into
228,369, 238,095, 800,000, 820,513, and 1,699,287 shares, respectively, of
Common Stock.
 
                                       F-7
<PAGE>   70
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stock Split and Reorganization
 
     On   , 1996, the Company effected a one- for- three reverse stock split of
each outstanding share of Common stock in N2K Inc., a Pennsylvania corporation,
to be effected prior to the reorganization of N2K Inc. as a Delaware corporation
which will occur immediately prior to the date of this Prospectus. All share,
stock option and warrant data have been restated to reflect the reverse stock
split.
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Interim Financial Statements
 
     The financial statements for the three months ended March 31, 1995 are
unaudited and, in the opinion of management, include all adjustments (consisting
only of normal and recurring adjustments) necessary for a fair presentation of
results for this interim period. The results of operations for the three months
ended March 31, 1995 and 1996 are not necessarily indicative of the results to
be expected for the entire year.
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
 
  Property and Equipment
 
     Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, which is
primarily four years. Leasehold improvements are amortized over the shorter of
the estimated useful life or the lease term. Improvements and betterments are
capitalized, and maintenance and repair costs are charged to expense as
incurred. Upon retirement or disposition, the applicable property amounts are
relieved from the accounts, and any gain or loss is recorded in the consolidated
statement of operations. When assets become fully depreciated or amortized, the
applicable asset and accumulated depreciation amounts are relieved.
 
  Goodwill
 
     Goodwill represents the excess of the purchase price of the N2K acquisition
(see Note 2) over the value of net assets acquired. Goodwill is amortized on a
straight-line basis over 5 years. Amortization expense was $7,000 for the three
months ended March 31, 1996. The Company evaluates the realizability of goodwill
based on estimates of undiscounted future cash flows over the remaining useful
life of the asset. If the amount of such estimated undiscounted future cash
flows is less than the net book value of the asset, the asset is written down to
the amount of the estimated undiscounted cash flows. As of March 31, 1996, no
such write-down was required.
 
  Pro Forma Net Loss Per Common Share (Unaudited)
 
     Pro forma net loss per Common share was calculated by dividing net loss by
the weighted average number of common shares outstanding for the respective
periods adjusted for the dilutive effect of common stock equivalents, which
consist of stock options using the treasury stock method. Pursuant to the
requirements of the Securities and Exchange Commission, common stock issued by
the Company during the twelve months immediately preceding the initial public
offering, plus the number of common equivalent shares which became issuable
during the same period pursuant to the grant of common stock options and
warrants, have been included in the calculation of the shares used in computing
pro forma net loss per Common share as if they were outstanding for all periods
presented (using the treasury stock method and the initial public offering price
of $11.00 per Common share). Pursuant to the policy of the staff of the
Securities and Exchange Commission, the calculation of shares used in computing
pro forma net loss per Common share
 
                                       F-8
<PAGE>   71
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
also includes the Series A, Series B, Series C and Series D Preferred stock
which will convert into 228,369, 238,095, 800,000 and 820,513 shares,
respectively, of Common stock upon the consummation of the Offering contemplated
by this Prospectus as if they were converted to Common stock on their original
date of issuance. The Series E and Series F Preferred Stock, which will convert
into 2,002,354 and 1,777,777 shares, respectively, of Common stock upon the
consummation of the Offering, have been included as outstanding for all periods
presented since they were issued during the twelve months immediately preceding
the initial public offering (see Note 4). Additionally, all common share and per
share amounts have been adjusted retroactively to give effect to the
pooling-of-interests transaction that occurred with Advanced Research
Technologies, Inc. (ART) on December 15, 1995 (see Note 2).
 
  Revenue Recognition
 
     Search (information services) revenues are recorded in the period in which
they are earned. Entertainment revenues which consist of music compact discs and
cassettes sold via the Internet, and includes shipping and handling charges, are
recognized as the product is shipped. The Company records the estimated gross
profit which will be lost due to current year's shipments being returned in
future periods as a reduction of sales and cost of sales in the period of
shipment.
 
  Deferred Revenues
 
     Deferred revenues represent amounts collected from or invoiced to customers
in excess of revenues recognized. Such amounts are recognized as revenue when
the related service is performed.
 
  Operating and development
 
     Operating and development expenses consist of software, engineering,
multimedia production, graphic design and computer operations used in the
development, operation and maintenance of the Company's services. For the year
ended December 31, 1995 and for the three months ended March 31, 1995 and 1996,
the Company incurred costs of $1,263,323, $286,549 and $495,894, respectively,
relating to research and development. These amounts are included in operating
and development expenses as shown on the accompanying consolidated statements of
operations. For the periods prior to 1995, the Company did not separately
identify research and development costs.
 
  Charge for Purchased Research and Development
 
     In connection with the acquisition of N2K Inc. (see Note 2) in February
1996, $4,133,281 of the purchase price was allocated to incomplete research and
development projects. Accordingly, these costs were charged to expense as of the
acquisition date. The amount allocated to the incomplete research and
development projects was determined by an independent appraisal. The development
of these projects had not yet reached technological feasibility and the
technology has no alternative future use. The technology acquired in the
acquisition of N2K Inc. will require substantial additional development by the
Company.
 
  Cash and Cash Equivalents
 
     For purposes of the Consolidated Statements 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
various mutual and money market funds.
 
  Supplemental Disclosures of Cash Flow Information
 
     For the years ended December 31, 1993, 1994, and 1995, and for the three
months ended March 31, 1995 and 1996, the Company paid interest of $90,805,
$50,809, $18,237, $3,544 and $16,552, respectively. For the
 
                                       F-9
<PAGE>   72
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
years ended December 31, 1993, 1994 and 1995, and for the three months ended
March 31, 1995 and 1996, the Company has received interest income of $50,721,
$67,263, $109,244, $28,706 and $23,791, respectively. Income taxes paid in 1993,
1994, 1995 and 1996 were immaterial. In addition, the Company incurred $84,387,
$159,099 and $43,013 in capital lease obligations during 1994, 1995 and for the
three months ended March 31, 1996, respectively. No capital lease obligations
were incurred in 1993 or during the three months ended March 31, 1995. The
following table displays the non cash assets and liabilities that were
consolidated as a result of the N2K acquisition (see Note 2):
 
<TABLE>
    <S>                                                                       <C>
    Noncash assets (liabilities):
      Accounts receivable...................................................  $    78,090
      Prepaid expenses......................................................        3,540
      Property and equipment................................................      557,455
      Other assets..........................................................       36,612
      Goodwill..............................................................      280,000
      Charge for purchased research and development.........................    4,133,281
      Accounts payable and other accrued liabilities........................     (405,118)
      Capital lease obligations.............................................     (308,379)
                                                                              -----------
         Net noncash assets acquired........................................    4,375,481
         Less -- Preferred stock issued.....................................   (1,078,286)
                 Common stock issued........................................   (3,073,118)
                                                                              -----------
      Cash paid, net of cash acquired.......................................  $   224,077
                                                                              ===========
</TABLE>
 
  Major Customers and Suppliers
 
     The Company sells its services and products primarily to large companies in
the online service industry. CompuServe Incorporated and the EasyLink Services
Division of AT&T accounted for 70% and 11% of revenues for the year ended
December 31, 1993, respectively. CompuServe Incorporated and NIFTY Corp.
accounted for 75% and 10% of revenues for the year ended December 31, 1994 and
76% and 11% of revenues for the year ended December 31, 1995, respectively.
CompuServe Incorporated and NIFTY Corp. accounted for 69% and 11% of revenues
for the three months ended March 31, 1996, respectively. As of December 31,
1994, the Company had accounts receivable from CompuServe Incorporated and NIFTY
Corp. of $1,510,207 and $69,376, respectively. As of December 31, 1995, the
Company had accounts receivable from CompuServe Incorporated and NIFTY Corp. of
$1,169,042 and $87,993, respectively. As of March 31, 1996, the Company had
accounts receivable from CompuServe Incorporated and NIFTY Corp. of $1,345,252
and $95,431, respectively. The Company has one vendor that accounted for 66%,
59%, 60% and 53% of the cost of revenues for the years ended December 31, 1993,
1994, 1995 and for the three months ended March 31, 1996, respectively. As of
December 31, 1994, 1995 and March 31, 1996, this same vendor was due $890,043,
$858,235 and $951,420. These amounts are included in accrued vendor on the
accompanying consolidated balance sheets and represent the direct cost incurred
to information providers for the content used in the Company's information
services segment.
 
  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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
                                      F-10
<PAGE>   73
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stock-Based Compensation Plans
 
     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. This statement
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company is required to adopt
SFAS 123 effective January 1, 1996. The Company has elected to adopt the
disclosure requirement of this pronouncement. The adoption of the disclosure
requirements is expected to have no impact on the Company's financial position
or results of operations.
 
2.  ACQUISITIONS:
 
  Merger with Advanced Research Technologies, Inc. (ART)
 
     On December 15, 1995, a wholly owned subsidiary of the Company, ART
Acquisition Corp., was merged with and into ART, an online information retrieval
service business, pursuant to which ART became a wholly owned subsidiary of the
Company, in exchange for 150,000 shares of the Company's Common stock in a
transaction accounted for as a pooling-of-interests. Prior to December 31, 1995,
ART Acquisition Corp. was merged into the Company. Accordingly, the financial
statements for 1993, 1994 and 1995 have been restated to include ART. A
reconciliation of revenues and net income (loss) for the Company and ART for the
periods presented is as follows:
 
<TABLE>
<CAPTION>
                                                        N2K           ART          POOLED
                                                    -----------     --------     -----------
    <S>                                             <C>             <C>          <C>
    Year ended December 31, 1993:
      Revenues....................................  $10,042,832     $317,425     $10,360,257
      Net income (loss)...........................      504,962          (76)        504,886
    Year ended December 31, 1994:
      Revenues....................................  $11,008,262     $383,518     $11,391,780
      Net income (loss)...........................      173,458      (31,048)        142,410
    Year-ended December 31, 1995:
      Revenues....................................  $10,610,799     $462,417     $11,073,216
      Net loss....................................   (1,562,995)     (31,805)     (1,594,800)
</TABLE>
 
     The difference in the stated value of the shares issued as compared to the
stated value of the shares of ART have been reflected as an increase in
additional paid-in capital.
 
  Acquisition of N2K Inc.
 
     On February 13, 1996, N2K Inc. (N2K), a New York corporation, merged with
and into Telebase Systems, Inc. in a transaction accounted for as a purchase.
Telebase Systems, Inc. issued 1,797,146 shares of Common Stock valued at
$3,073,118 and 1,347,860 shares of its newly created Series E Preferred stock
valued at $1,078,286 in exchange for all of the outstanding Common stock of N2K.
The fair value assigned to the Common stock was determined based upon an
independent appraisal. Telebase Systems, Inc. is the surviving corporation;
however, the corporate name of the surviving corporation has been changed to N2K
Inc. The results of the acquired business have been included in the consolidated
financial statements from the date of acquisition. The total purchase price of
$4,413,281, including transaction costs, was allocated to the assets acquired
and liabilities assumed based on their respective fair values. As discussed in
Note 1, the Company recorded $4,133,281 of the purchase price as a charge to the
consolidated statements of operations on the acquisition date as it was related
to the fair value of incomplete research and development projects. The excess of
the purchase price over the fair value of the net assets acquired (goodwill) was
$280,000 and is being amortized over 5 years on a straight-line basis. If the
acquisition of N2K had occurred on January 1, 1995, the
 
                                      F-11
<PAGE>   74
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
unaudited pro forma information, after giving effect to certain pro forma
adjustments, would have been as follows:
 
<TABLE>
<CAPTION>
                                                                             THREE MONTHS
                                                         YEAR ENDED             ENDED
                                                      DECEMBER 31, 1995     MARCH 31, 1996
                                                      -----------------     --------------
    <S>                                               <C>                   <C>
    Unaudited pro forma revenues....................     $11,216,842         $  2,799,809
                                                         ===========          ===========
    Unaudited pro forma net loss....................     $(2,839,579)        $ (1,634,819)
                                                         ===========          ===========
    Unaudited pro forma net loss per Common share...     $     (0.26)        $      (0.15)
                                                         ===========          ===========
</TABLE>
 
     The above pro forma information excludes the one time charge of $4,133,281
associated with the write-off of purchased research and development costs.
 
     On February 13, 1996, the Company sold 3,750,000 shares of Series E
Preferred stock at $.80 per share and received gross proceeds of $3,000,000 (see
Note 4).
 
  Acquisition of Rocktropolis Website
 
     On June 21, 1996, the Company acquired the rock website, Rocktropolis, from
Rocktropolis Enterprises, LLC for $633,000 in cash and 59,722 shares of Common
stock. The acquisition will be accounted for as a purchase. The Company will
charge to expense as of the date of the acquisition a significant portion of the
purchase price as a one-time charge to record the write-off of purchased
research and development. Such charge to expense will be recorded in the quarter
ending June 30, 1996.
 
3.  CREDIT AGREEMENTS:
 
     The Company has a line of credit with a bank of $1,000,000 as of March 31,
1996. The line of credit expires on June 30, 1996, at which time the outstanding
principal balance, if any, becomes payable unless the line of credit is
extended. The Company is obligated to pay a commitment fee equal to .5% on the
average daily unused portion of the commitment. The line of credit bears
interest at the prime rate for borrowings which do not exceed $500,000 and at
the prime rate plus 1% for borrowings which exceed $500,000 and is secured by a
$500,000 certificate of deposit and a security interest in substantially all
corporate assets. The $500,000 is shown as restricted cash in current assets on
the accompanying consolidated balance sheets. Maximum borrowings are limited to
certain percentages of eligible accounts receivable (as defined), plus the
$500,000 certificate of deposit. As of June 21, 1996, the Company is negotiating
an extension of this line of credit. During 1994, 1995 and the three months
ended March 31, 1996, the maximum amount outstanding was $500,000, $400,000 and
$600,000, respectively. For the years ended December 31, 1993, 1994, and 1995,
and for the three months ended March 31, 1996, the weighted average interest
rate was 7%, 7.5%, 8.7% and 8.5%, respectively. No amount was outstanding during
the three months ended March 31, 1995. In addition, this line of credit requires
the Company to meet certain financial covenants. Interest expense for the years
ended December 31, 1993, 1994 and 1995, and for the three months ended March 31,
1996, was $34,203, $21,236, $7,360 and $4,992, respectively. No interest expense
was incurred for the three months ended March 31, 1995.
 
                                      F-12
<PAGE>   75
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In January 1989, the Company entered into a $300,000 subordinated note
agreement with the Philadelphia Industrial Development Corporation (PIDC). The
note was unsecured and bore interest at 13%, payable quarterly. The final
principal payment of $75,000 was paid in December 1994. Interest expense was
$19,500 in 1993 and $9,750 in 1994.
 
4.  PREFERRED STOCK:
 
     Preferred stock consists of the following:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------     MARCH 31,
                                                               1994       1995        1996
                                                              ------     ------     ---------
    <S>                                                       <C>        <C>        <C>
    Preferred stock, $.001 stated value, 20,000,000 shares
      authorized and designated as follows --
      Series A, 500,000 shares authorized, 488,838 shares
         issued and outstanding.............................  $  489     $  489      $   489
      Series B, 625,000 shares authorized, issued and
         outstanding........................................     625        625          625
      Series C, 2,857,143 shares authorized, 2,142,857
         shares issued and outstanding......................   2,143      2,143        2,143
      Series D, 1,000,000 shares authorized, 800,000 shares
         issued and outstanding.............................     800        800          800
      Series E, 5,097,860 shares authorized, 5,097,860
         shares issued and outstanding......................      --         --        5,098
                                                              ------     ------     ---------
                                                              $4,057     $4,057      $ 9,155
                                                              ======     ======      =======
</TABLE>
 
     In January 1988, the Company issued 488,838 shares of Series A Preferred
stock at $1.25 per share upon the conversion of certain liabilities. The Series
A Preferred shares are convertible into 228,369 shares of Common stock, subject
to adjustment (as defined).
 
     In March 1988, the Company sold 625,000 shares of Series B Preferred stock
for $1,000,000. In August 1988, the Company sold 2,142,857 shares of Series C
Preferred stock for $3,000,000. In 1993, the Series C Preferred stockholder sold
all of its shares to various outside investors, as well as to officers of the
Company. The Series B and Series C Preferred shares are convertible into 238,095
and 800,000 shares of Common stock, respectively, subject to adjustment (as
defined).
 
     In September 1994, the Company sold 800,000 shares of Series D Preferred
stock at $2 per share and received net proceeds of $1,559,084. The Series D
Preferred shares are convertible into 820,513 shares of Common stock, subject to
adjustment (as defined).
 
     On February 13, 1996, the Company sold 1,347,860 shares of Series E
Preferred Stock in connection with the acquisition of N2K. (See Note 2). Also,
on February 13, 1996, the Company sold 3,750,000 shares of Series E Preferred
Stock for $.80 per share and received gross proceeds of $3,000,000. The Series E
Preferred shares are convertible into 1,699,287 shares of Common stock, subject
to adjustment (as defined).
 
     Subsequent to March 31, 1996, the Company sold 909,200 shares of Series E
Preferred stock at $.80 per share and received net proceeds of approximately
$700,000. The Series E Preferred shares are convertible into 303,067 shares of
Common stock, subject to adjustment (as defined). Additionally, subsequent to
March 31, 1996, the Company sold 5,333,333 shares of Series F Preferred stock at
$3 per share and received net proceeds
 
                                      F-13
<PAGE>   76
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
of approximately $15,200,000. The Series F Preferred shares are convertible into
1,777,777 shares of Common stock, subject to adjustment (as defined).
 
     The Company has reserved 5,867,108 shares of Common stock for the
conversion of all series of Preferred stock. Each series of Preferred stock has
voting rights equal to the number of shares that would be received if it was
converted into Common stock.
 
5.  STOCKHOLDERS' EQUITY:
 
  Common Stock Options
 
     Under the Company's 1987 Incentive Stock Option Plan, options to purchase
1,033,333 shares of Common stock may be granted to certain officers, directors
and employees. The options expire ten years from the date of grant and vest over
four years. Expiration dates range from 1997 to 2005. As of March 31, 1996, no
additional grants will be made under this plan.
 
     Additionally, the Company has 101,521 nonqualified stock options
outstanding as of March 31, 1996, with expiration dates ranging from January
1997 to January 2004. These options vest immediately upon grant.
 
     In February 1996, the Company established the 1996 Stock Option Plan, which
authorized options to purchase 2,200,000 shares of Common stock, as amended and
restated on June 20, 1996. Under the 1996 Stock Option Plan, options may be
granted to officers, directors and other key employees. The options expire ten
years from the date of grant and vest over four years, unless specifically
agreed to otherwise. The exercise price is fixed at the grant date and shall
equal at least 100% of the fair market value of the Common stock on the date of
grant.
 
     Information relative to the 1987 Incentive Stock Option Plan, the
nonqualified stock options and the 1996 Stock Option Plan is as follows:
 
<TABLE>
<CAPTION>
                                                                      OPTION PRICE     AGGREGATE
                                                         OPTIONS       (PER SHARE)      PROCEEDS
                                                        ---------     -------------    ----------
<S>                                                     <C>           <C>              <C>
Balance as of December 31, 1992.......................    419,188      $1.875-$3.75    $1,224,884
  Granted.............................................     57,666             $2.40       138,400
  Exercised...........................................         --                --            --
  Terminated..........................................    (52,000)     $ 2.40-$3.75      (169,800)
                                                        ---------      ------------    ----------
Balance as of December 31, 1993.......................    424,854      $1.875-$3.75     1,193,484
  Granted.............................................    106,333      $ 1.95-$2.40       210,200
  Exercised...........................................        (33)            $2.40           (80)
  Terminated..........................................     (1,966)            $2.40        (4,720)
                                                        ---------      ------------    ----------
Balance as of December 31, 1994.......................    529,188      $1.875-$3.75     1,398,884
  Granted.............................................    308,500      $ 1.95-$2.40       608,325
  Exercised...........................................        (33)            $2.40           (80)
  Terminated..........................................     (7,800)            $2.40       (18,720)
                                                        ---------      ------------    ----------
Balance as of December 31, 1995.......................    829,855      $1.875-$3.75     1,988,409
  Granted.............................................  1,100,264      $ 2.40-$2.64     2,765,434
  Exercised...........................................        (83)            $1.95          (162)
  Terminated..........................................    (77,417)     $ 1.95-$2.40      (176,763)
                                                        ---------      ------------    ----------
Balance as of March 31, 1996..........................  1,852,619      $1.875-$3.75    $4,576,918
                                                        =========      ============    ==========
Options exercisable as of March 31, 1996..............    395,021
                                                        =========
</TABLE>
 
                                      F-14
<PAGE>   77
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Subsequent to March 31, 1996, the Company granted options to purchase
28,333 shares of Common stock at an exercise price of $2.40 per share. These
options were issued under the 1996 Stock Option Plan. As of June 20, 1996,
1,071,403 options are available for grant under the 1996 Stock Option Plan.
 
  Common Stock Warrants
 
     In February 1996, the Company issued warrants to purchase 50,000 shares of
Common stock at an exercise price of $2.40 per share. These warrants expire in
February 2001. Subsequent to March 31, 1996, the Company issued warrants to
purchase 85,555 shares of Common stock at an exercise price of $9.00 per share.
These warrants expire in 2003.
 
  Employee Stock Purchase Plan
 
     In June 1996, the Company established the 1996 Employee Stock Purchase Plan
(the Plan). The number of shares available to purchase under the Plan is
1,500,000 shares of Common Stock. As of June 21, 1996, 1,500,000 shares are
available for purchase under the Plan. The employees purchase price is the lower
of (a) 85% of the fair market value of a share of the Company's Common stock on
the first day of a Purchase period (as defined) or (b) 85% of the fair market
value of a share of the Company's Common stock on the last day of the Purchase
period (as defined).
 
6.  INCOME TAXES:
 
     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires an asset-and-liability approach in accounting for income
taxes. Under this method, deferred income taxes are computed based on the
differences between financial reporting and income tax reporting of assets and
liabilities using enacted tax rates.
 
     As of December 31, 1995, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $6,800,000, which begin to
expire in 2001. Significant components of deferred income taxes consist of the
following:
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31
                                                                    ---------------------------
                                                                       1994            1995
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Gross deferred tax asset:
  Net operating loss carryforwards................................  $ 1,995,000     $ 2,584,000
  Depreciation and amortization...................................       15,200          38,000
  Accruals not currently deductible...............................      159,000         152,500
                                                                       --------        --------
                                                                      2,169,200       2,774,500
  Less: Valuation allowance.......................................   (2,169,200)     (2,774,500)
                                                                       --------        --------
                                                                    $   --          $   --
                                                                       ========        ========
</TABLE>
 
     No tax benefits have been recognized in the accompanying consolidated
statements of operations due to the valuation allowance. The valuation allowance
increased $605,300 during 1995 due principally to net operating loss
carryforwards. Based on changes in ownership of the Company, utilization of the
net operating loss carryforwards may be subject to annual limitations.
 
7.  RELATED-PARTY TRANSACTIONS:
 
     The Company incurred $30,000 in consulting fees to a Board member in 1993.
None were incurred in 1994, 1995 or the three months ended March 31, 1996. For
the years ended December 31, 1993, 1994, and 1995, and for the three months
ended March 31, 1995 and 1996, the Company incurred fees of $30,000,
 
                                      F-15
<PAGE>   78
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
$30,000, $30,000, $1,000 and $79,000 to a law firm in which certain of its
partners are Series A Preferred stockholders.
 
8.  COMMITMENTS AND CONTINGENCIES:
 
     The Company has entered into various operating and capital leases for
office space, computer equipment and office equipment. Assets acquired under
capital leases at a cost of $489,953, $649,052 and $1,018,686, less accumulated
amortization of $338,351, $441,049 and $473,735, are included in property and
equipment in the accompanying consolidated balance sheets as of December 31,
1994, 1995 and March 31, 1996, respectively. Certain capital leases are secured
by certificates of deposit totaling $167,000, which are shown as restricted cash
in other assets on the accompanying consolidated balance sheets. Future minimum
lease payments under operating and capital leases as of December 31, 1995, are
as follows:
 
<TABLE>
<CAPTION>
                                                                   OPERATING      CAPITAL
                                                                   ----------     --------
    <S>                                                            <C>            <C>
    1996.........................................................  $  265,274     $ 79,394
    1997.........................................................     263,641       71,855
    1998.........................................................     256,008       63,509
    1999.........................................................     251,658       30,701
    2000.........................................................     251,250           --
    2001 and thereafter..........................................     167,500           --
                                                                   ----------     --------
    Total minimum lease payments.................................  $1,455,331      245,459
                                                                   ==========
    Less -- Amount representing interest.........................                  (32,702)
                                                                                  --------
    Present value of minimum capital lease payments..............                 $212,757
                                                                                  ========
</TABLE>
 
     In connection with the acquisition of N2K on February 13, 1996 (see Note
2), the Company became obligated under certain additional operating and capital
leases for office space, computer equipment and office equipment. The future
minimum lease payments under these operating leases as of March 31, 1996 are as
follows: $157,227 in 1997, $170,560 in 1998, $220,489 in 1999, $219,555 in 2000
and $199,517 in 2001. The future minimum lease payments under these capital
leases as of March 31, 1996 are as follows: $143,110 in 1997, $139,173 in 1998
and $132,599 in 1999. Rent expense under the operating leases for the years
ended December 31, 1993, 1994, and 1995, and for the three months ended March
31, 1995 and 1996, was $288,284, $260,930, $270,136, $68,107 and $112,852,
respectively.
 
     The Company has an agreement with certain founders that requires royalty
payments of .825% to .9% on defined information services revenues. For the years
ended December 31, 1993, 1994, and 1995, and the three months ended March 31,
1995 and 1996, the Company incurred royalty expense of $95,000, $99,058,
$94,623, $27,523 and $21,425, respectively.
 
     The Company has employment agreements with certain officers.
 
     The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
 
9.  DEFINED CONTRIBUTION PLAN:
 
     The Company maintains a Matched Savings Plan (the Plan) in accordance with
the provisions of Section 401(k) of the Internal Revenue Code. The Plan covers
substantially all full-time employees of the Company. Participants may
contribute up to 15% of their total compensation to the Plan, with the Company
matching 30% of the participant's contribution, limited to 6% of the
participant's total compensation. For the years
 
                                      F-16
<PAGE>   79
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
ended December 31, 1993, 1994, and 1995 and the three months ended March 31,
1995 and 1996, the Company contributed $23,000, $32,500, $38,900, $10,100 and
$11,700, respectively, to the Plan.
 
10.  SEGMENT INFORMATION:
 
     The Company operates principally within two segments: Entertainment and
Information services. See Note 1 for description of each segment.
 
The following table highlights certain financial information about each of the
Company's segments for the year ended December 31, 1995.
 
<TABLE>
<CAPTION>
                                                      INFORMATION     GENERAL AND
                                     ENTERTAINMENT     SERVICES      ADMINISTRATIVE    CONSOLIDATED
                                     -------------    -----------    --------------    ------------
<S>                                  <C>              <C>            <C>               <C>
Revenues...........................   $    96,505     $10,976,711               --     $11,073,216
                                      -----------     -----------      -----------     -----------
Operating income (loss)............   $(1,567,780)    $ 1,222,878               --     $  (344,902 )
                                      -----------     -----------      -----------     -----------
General and administrative
  expenses.........................            --              --     $  1,337,731     $ 1,337,731
Interest income, net...............            --              --     $    (88,133)    $   (88,133 )
                                                                                       -----------
Loss before income taxes...........            --              --               --     $(1,594,500 )
                                                                                       ===========
Depreciation and amortization......   $    18,793     $   117,488     $    102,277     $   238,558
                                      ===========     ===========      ===========     ===========
Capital expenditures...............   $   240,445     $    49,466     $     48,810     $   338,721
                                      ===========     ===========      ===========     ===========
Total identifiable assets at
  December 31, 1995................   $   275,768     $ 1,983,393     $  1,399,499     $ 3,658,660
                                      ===========     ===========      ===========     ===========
</TABLE>
 
For the year ended December 31, 1995, information services revenues consisted of
$9,308,453 sales to domestic customers and $1,668,258 sales to international
customers.
 
                                      F-17
<PAGE>   80
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors
N2K, Inc.
New York, New York
 
     We have audited the balance sheet of N2K, Inc. as of December 31, 1995, and
the related statements of operations, stockholders' equity and cash flows for
the period beginning March 7, 1995 (date of inception) through December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of N2K, Inc. as of December 31,
1995 and the results of its operations and its cash flows for the period
beginning March 7, 1995 through December 31, 1995 in conformity with generally
accepted accounting principles.
 
     As described in Note F, on February 13, 1996, the Company effected a
business combination in which it merged with a company formerly known as
Telebase Systems, Inc.
 
New York, New York
January 31, 1996
 
With respect to Note F
February 13, 1996
                                          /s/  RICHARD A. EISNER & COMPANY, LLP
 
                                      F-18
<PAGE>   81
 
                                   N2K, INC.
                                 BALANCE SHEET
                               DECEMBER 31, 1995
 
<TABLE>
<S>                                                                                <C>
                                           ASSETS
Current assets:
     Cash and cash equivalents...................................................  $ 245,423
     Accounts receivable.........................................................     57,281
     Prepaid expenses............................................................      2,057
                                                                                    --------
          Total current assets...................................................    304,761
Property and equipment, net......................................................    311,812
Goodwill.........................................................................      4,467
Deposits.........................................................................    101,621
                                                                                    --------
          TOTAL..................................................................  $ 722,661
                                                                                    ========
                            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current maturities of capital lease obligations.............................  $  57,407
     Accounts payable and accrued expenses.......................................    207,144
                                                                                    --------
          Total current liabilities..............................................    264,551
Capital lease obligations........................................................    136,184
Deferred rent payable............................................................     20,038
                                                                                    --------
          Total liabilities......................................................    420,773
                                                                                    --------
Commitments and contingencies
Stockholders' equity:
     Common stock, $.01 par value, 2,000,000 authorized, 1,000,000 shares issued
      and outstanding............................................................     10,000
     Additional paid-in capital..................................................    990,000
     Accumulated (deficit).......................................................   (698,112)
                                                                                    --------
          Total stockholders' equity.............................................    301,888
                                                                                    --------
          TOTAL..................................................................  $ 722,661
                                                                                    ========
</TABLE>
 
   The accompanying notes to financial statements are an integral part hereof
 
                                      F-19
<PAGE>   82
 
                                   N2K, INC.
                            STATEMENT OF OPERATIONS
                     FOR THE PERIOD BEGINNING MARCH 7, 1995
                 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
 
<TABLE>
<S>                                                                                <C>
Revenues:
     Consulting revenue..........................................................  $ 132,626
     Network revenue.............................................................     11,000
                                                                                    --------
          Total revenue..........................................................    143,626
                                                                                    --------
Expenses:
     Selling, general and administrative expenses................................    767,628
     Purchased research and development..........................................     56,262
     Depreciation and amortization...............................................     16,575
                                                                                    --------
          Total expense..........................................................    840,465
                                                                                    --------
Operating loss...................................................................   (696,839)
Interest expense, net of interest income of $185.................................     (1,273)
                                                                                    --------
Net loss.........................................................................  $(698,112)
                                                                                    ========
</TABLE>
 
   The accompanying notes to financial statements are an integral part hereof
 
                                      F-20
<PAGE>   83
 
                                   N2K, INC.
                       STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD BEGINNING MARCH 7, 1995
                 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
 
<TABLE>
<CAPTION>
                                                            ADDITIONAL
                                                COMMON      PAID-IN      ACCUMULATED
                                                 STOCK      CAPITAL       DEFICIT         TOTAL
                                                -------     --------     ----------     ----------
<S>                                             <C>         <C>          <C>            <C>
Sale of common stock..........................  $10,000     $990,000                    $1,000,000
Net loss......................................                           $ (698,112)      (698,112)
                                                -------     --------     ----------       --------
Balance -- December 31, 1995..................  $10,000     $990,000     $ (698,112)    $  301,888
                                                =======     ========     ==========       ========
</TABLE>
 
   The accompanying notes to financial statements are an integral part hereof
 
                                      F-21
<PAGE>   84
 
                                   N2K, INC.
                            STATEMENT OF CASH FLOWS
                     FOR THE PERIOD BEGINNING MARCH 7, 1995
                 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
 
<TABLE>
<S>                                                                                <C>
Cash flows from operating activities:
     Net loss....................................................................  $(698,112)
     Adjustments to reconcile net loss to net cash used in operating activities:
          Depreciation and amortization..........................................     16,575
          Changes in assets and liabilities:
               Increase in:
                    Accounts receivable..........................................    (48,543)
                    Prepaid expenses.............................................     (2,057)
                    Deposits.....................................................   (101,621)
                    Accounts payable and accrued expenses........................    207,144
                    Deferred rent payable........................................     20,038
                                                                                   ---------
                         Net cash used in operating activities...................   (606,576)
                                                                                   ---------
Cash flows from investing activities:
     Assets acquired in purchase transaction.....................................    (43,738)
     Purchase of property and equipment..........................................   (101,612)
                                                                                   ---------
                         Net cash used in investing activities...................   (145,350)
                                                                                   ---------
Cash flows from financing activities:
     Principal payments on capital lease obligations.............................     (2,651)
     Sale of common stock........................................................  1,000,000
                                                                                   ---------
                         Net cash provided by financing activities...............    997,349
                                                                                   ---------
Increase in cash and cash equivalents............................................    245,423
Cash and cash equivalents, beginning of period...................................         --
                                                                                   ---------
Cash and cash equivalents, end of period.........................................  $ 245,423
                                                                                   =========
Supplemental disclosures of cash flow information:
     Cash paid during the period for interest....................................  $   1,458
     Noncash investing and financing activity:
          The Company entered into capital leases for equipment valued at
          $196,242.
</TABLE>
 
   The accompanying notes to financial statements are an integral part hereof
 
                                      F-22
<PAGE>   85
 
                                   N2K, INC.
                         NOTES TO FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION AND ACQUISITION:
 
     N2K Multimedia Company, Inc. (the "Company") was incorporated on March 7,
1995 for the purpose of developing interactive online web sites and technology,
with 200 shares of authorized common stock of which 100 shares were issued in
exchange for $100,000 paid in cash. On October 10, 1995 the authorized common
stock was increased to 2,000,000 shares of $.01 par value and the outstanding
shares were split 10,000 for 1. All references to shares in these financial
statements give retroactive effect to the stock split. On June 13, 1995 the
Company purchased substantially all the assets of N2K, Inc. a company engaged
primarily in computer systems consulting and its name was changed to N2K, Inc.
The purchase price was $100,000 which was allocated in accordance with fair
values as follows: Fixed Assets $30,000; Accounts Receivable $8,738; Research
and Development Costs $56,262, and Goodwill $5,000. Because computer systems
consulting is not the focus of the Company, the acquiree is not a predecessor
company.
 
     After the acquisition the Company developed an online site called Jazz
Central Station that provides a comprehensive history of Jazz. The site was
launched on the Microsoft Network on August 24, 1995 and is in beta testing on
the World Wide Web.
 
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
     [1] Use of estimates:
 
     These financial statements were prepared by management using generally
accepted accounting principles which require the use of estimates.
 
     [2] Property and equipment:
 
     Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over estimated useful lives of the assets, primarily 5
years. Upon retirement or disposition, the applicable property amounts are
relieved from the accounts, and any gain or loss is recorded in the statement of
operations. When assets become fully depreciated, the applicable asset and
accumulated depreciation amounts are relieved.
 
     [3] Goodwill:
 
     Goodwill, which represents the excess purchase price of N2K, Inc. over the
fair value of the identifiable assets acquired, is being amortized on a
straight-line basis over five years.
 
     [4] Statement of Cash Flows:
 
     Highly liquid investments with an original maturity of three months or less
are considered cash equivalents for purposes of the statement of cash flows.
 
     [5] Capital Leases:
 
     The Company capitalizes assets acquired under capital leases and records
the related capital lease obligations.
 
     [6] Income Taxes:
 
     The Company is an S corporation for Federal and State income tax purposes.
No provision for these taxes is required.
 
                                      F-23
<PAGE>   86
 
                                   N2K, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE C -- PROPERTY AND EQUIPMENT:
 
     Property and equipment consists of the following:
 
<TABLE>
    <S>                                                                         <C>
    Computer equipment........................................................  $249,726
    Furniture and fixtures....................................................    16,796
    Leasehold improvements....................................................    61,332
                                                                                --------
                                                                                 327,854
    Less accumulated depreciation.............................................   (16,042)
                                                                                --------
                                                                                $311,812
                                                                                ========
</TABLE>
 
     Included in property and equipment is property acquired under capital
leases with an aggregate cost of $196,242 and accumulated depreciation of
$9,569.
 
NOTE D -- EQUIPMENT LEASE FINANCING:
 
     The Company has a line of credit to finance its acquisition of furniture,
office and computer equipment in the amount of $350,000. Under the terms of the
master agreement, acquired assets are financed pursuant to capital leases with a
three year term and interest rate of 8.75%. At December 31, 1995 $175,424 of the
line of credit was available. The Company is also obligated under two other
capital leases with interest rates of approximately 14% and aggregating $18,167
at December 31, 1995.
 
NOTE E -- COMMITMENTS, CONTINGENCIES AND RISKS:
 
     The Company is obligated under operating and capital leases for office
space, computers and office equipment. Future annual minimum lease payments
under leases in effect at December 31, 1995 are as follows:
 
<TABLE>
<CAPTION>
                                                                 OPERATING    CAPITAL
                                                                 --------     --------
        <S>                                                      <C>          <C>
        1996...................................................  $120,456     $ 72,233
        1997...................................................   196,088       75,795
        1998...................................................   195,356       68,132
        1999...................................................   219,550        5,522
        2000...................................................   213,155         -0 -
                                                                 --------     --------
                                                                               221,682
        Less amount representing interest......................                 28,091
                                                                              --------
        Present value of capital lease obligations.............               $193,591
                                                                              ========
</TABLE>
 
     The Company maintains its accounts at one institution insured by the
Federal Deposit Insurance Corporation up to a maximum of $100,000.
 
     The Company is committed to purchase furniture and equipment aggregating
approximately $125,000 which it expects to finance under the equipment lease
financing commitment described in Note D.
 
     Two of the Company's consulting customers individually accounted for 59%
and 27% of the Company's consulting revenues for the period ended December 31,
1995 and 76% and 22% of the accounts receivable at December 31, 1995.
 
NOTE F -- SUBSEQUENT EVENT:
 
     The Company merged with Telebase Systems, Inc. on February 13, 1996.
Pursuant to the merger the Company's shares were exchanged for common and
preferred shares of Telebase Systems, Inc. which changed its name to N2K Inc.
 
                                      F-24
<PAGE>   87
 
          ------------------------------------------------------------
          ------------------------------------------------------------
     No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any of the
Underwriters or any other person. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, any security other than the
shares of Common Stock offered hereby, nor does it constitute an offer to sell,
or a solicitation of an offer to buy, any of the securities offered hereby to
any person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sales made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
                            ------------------------
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                        PAGE
                                        -----
<S>                                     <C>
Prospectus Summary....................     3
Risk Factors..........................     7
Use of Proceeds.......................    16
Dividend Policy.......................    16
Dilution..............................    17
Capitalization........................    18
Selected Consolidated Financial
  Information.........................    19
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................    21
Business..............................    27
Management............................    43
Certain Transactions..................    51
Principal Stockholders................    53
Description of Capital Stock..........    54
Shares Eligible for Future Sale.......    57
Underwriting..........................    58
Legal Matters.........................    59
Experts...............................    59
Additional Information................    60
Index to Consolidated Financial
  Statements..........................   F-1
</TABLE>
 
                            ------------------------
     Until               , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
 
- ------------------------------------------------------------
- ------------------------------------------------------------
 
- ------------------------------------------------------------
- ------------------------------------------------------------
 
                                2,600,000 SHARES
 
                                     [LOGO]
 
                                    N2K INC.
 
                                  COMMON STOCK
                         ------------------------------
                                   PROSPECTUS
                         ------------------------------
                                COWEN & COMPANY
                            OPPENHEIMER & CO., INC.
                                UNTERBERG HARRIS
 
                                                , 1996
 
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE>   88
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Common Stock offered hereby, other than underwriting discounts and commissions:
 
<TABLE>
    <S>                                                                          <C>
    Securities and Exchange Commission.........................................   $12,372
    Nasdaq National Market Listing Fee.........................................    48,384
    NASD Filing Fee............................................................     4,088
    Blue Sky fees and expenses (including attorneys' fees).....................     *
    Accounting fees and expenses...............................................     *
    Legal fees and expenses....................................................     *
    Printing and engraving expenses............................................     *
    Transfer agent and registrar fees..........................................     *
    Miscellaneous..............................................................     *
                                                                                 --------
              Total............................................................  $
                                                                                  =======
</TABLE>
 
- ------------
 
* To be completed by amendment.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     (a) The Delaware GCL (Section 145) (i) gives Delaware corporations broad
powers to indemnify their present and former directors and officers and those of
affiliated corporations against expenses incurred in the defense of any lawsuit
to which they are made parties by reason of being or having been such directors
or officers, subject to specified conditions and exclusions; (ii) gives a
director or officer who successfully defends an action the right to be so
indemnified; and (iii) authorizes the Registrant to buy directors' and officers'
liability insurance. Such indemnification is not exclusive of any other rights
to which those indemnified may be entitled under any by-laws, agreement, vote of
stockholders or otherwise.
 
     (b) The Certificate of Incorporation of the Registrant requires, and the
Bylaws of the Registrant provide for, indemnification of directors, officers,
employees and agents to the full extent permitted by law.
 
     (c) See the Underwriting Agreement (the form of which is included as
Exhibit 1.1 to this Registration Statement) for provisions regarding the
indemnification under certain circumstances of the Registrant, its directors and
certain of its officers by the Underwriters.
 
     (d) In accordance with Section 102(b)(7) of the Delaware GCL, the
Registrant's Certificate of Incorporation provides that directors shall not be
personally liable for monetary damages for breaches of their fiduciary duty as
directors except for (1) breaches of their duty of loyalty to the Registrant or
its stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law, (3) under Section 174 of
the Delaware GCL (unlawful payment of dividends) or (4) transactions from which
a director derives an improper personal benefit.
 
                                      II-1
<PAGE>   89
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     In September 1994, the Company issued 800,000 shares of Series D Preferred
Stock to a class of purchasers for the aggregate offering price of $1,600,000
resulting in net proceeds of $1,559,084. Such transaction was exempt from
registration under the Securities Act by virtue of Section 4(2) thereof.
 
     In December 1995, the Company issued 150,000 shares of Common Stock as
consideration in a pooling-of-interests transaction in which Advanced Research
Technologies, Inc. was merged with and into ART Acquisition Corp., a
wholly-owned subsidiary of the Company. Prior to December 31, 1995, ART
Acquisition Corp. was merged into the Company.
 
     In February 1996, the Company issued 1,797,146 shares of Common Stock and
1,347,860 shares of Series E Preferred Stock in exchange for all of the
outstanding common stock of New York N2K. The Company subsequently changed its
name to N2K Inc.
 
     In February 1996, the Company issued a warrant to Unterberg Harris to
purchase 50,000 shares of Common Stock at an exercice price of $2.40 per share
as compensation for acting as financial advisor to the Company in connection
with the Merger.
 
     In February, April and May 1996, the Company issued 4,659,200 shares of
Series E Preferred Stock (in addition to the 1,347,860 shares of Series E
Preferred Stock issued in consideration for the shares of N2K Inc.), to a class
of purchasers for the aggregate offering price of $3,727,360 resulting in net
proceeds of $3,652,360. Such transactions were exempt from registration under
the Securities Act by virtue of Section 4(2) thereof.
 
     In May and June 1996, the Company issued 5,333,333 shares of Series F
Preferred Stock to a class of purchasers for the aggregate offering price of
$16,000,000 resulting in net proceeds of $15,200,000. Such transactions were
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof.
 
     In May and June 1996, the Company issued warrants to Allen & Company
Incorporated to purchase 85,555 shares of Common Stock at an exercise price of
$9.00 per share, as compensation for acting as placement agent to the Company in
connection with the issuance of the Series F Preferred Stock.
 
     In May 1996, the Company issued 8,333 shares of Common Stock in payment to
a vendor for services rendered.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
  (a) Exhibits
 
<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                                       DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<S>              <C>
        1.1   -- Form of Underwriting Agreement.*
        3.1   -- Form of Certificate of Incorporation of the Registrant, as amended.
        3.2   -- Form of Bylaws of the Registrant, as amended.
        4.1   -- Specimen of Certificate for Common Stock.*
        4.2   -- 1987 Employee Incentive Stock Option Plan of the Company.
        4.3   -- Amended and Restated 1996 Stock Option Plan of the Company.*
        4.4   -- 1996 Employee Stock Purchase Plan.*
        4.5   -- Note Purchase Agreement dated October 30, 1987 between the Company and Gary
                 M. Lauder.
        4.6   -- Form of Series A Preferred Stock Purchase Agreement.
        4.7   -- Form of Series C Preferred Stock Purchase Agreement.
        4.8   -- Form of Series D Preferred Stock Purchase Agreement.
        4.9   -- Form of Series E Preferred Stock Purchase Agreement.
        4.10  -- Form of Series F Preferred Stock Purchase Agreement.
        4.11  -- Registration Rights Agreement dated as of February 13, 1996 among the Company
                 and the stockholders of New York N2K.
        4.12  -- Warrant Agreement dated as of February 13, 1996 between N2K Inc. and
                 Unterberg Harris.
</TABLE>
 
                                      II-2
<PAGE>   90
 
<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                                       DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<S>              <C>
        5.1   -- Opinion of Dewey Ballantine.*
        10.1  -- Employment Agreement effective as of February 13, 1996 between the Company
                 and Lawrence L. Rosen.
        10.2  -- Employment Agreement effective as of February 13, 1996 between the Company
                 and Jonathan V. Diamond.
        10.3  -- Employment Agreement effective as of February 13, 1996 between the Company
                 and Robert David Grusin.
        10.4  -- Employment Agreement dated as of May 1, 1987 between the Company and
                 James E. Coane.
        10.5  -- Employment Agreement dated as of February 8, 1988 between the Company and
                 Bruce Johnson.
        10.6  -- Agreement re: Revolving Line of Credit with CoreStates Bank, N.A. (f.k.a.
                 Meridian Bank).*
        10.7  -- Letter Agreement dated June 3, 1996 between the Company and Rocktropolis
                 Enterprises, LLC.
        10.8  -- Lease Agreement dated April 26, 1991 between the Company and Bebob
                 Associates, as amended.
        10.9  -- Lease Agreement dated September 7, 1995 between New York N2K and 55 Broad
                 Street Company, as amended.
        10.10 -- Agreement dated November 4, 1985 between the Company and CompuServe, as
                 amended.+
        10.11 -- Distributorship Agreement dated August 1, 1992 between the Company and Nifty
                 Corporation.+
        10.12 -- Discount Agreement dated January 25, 1995 between the Company and
                 Knight-Ridder Information, Inc.+
        10.13 -- Small Order Fulfillment Agreement between the Company and Valley Record
                 Distributors.+
        10.14 -- Indemnification Agreement dated as of February 13, 1996 among the Company and
                 the stockholders of New York N2K.
        11.1  -- Statement re: Computation of Per Share Earnings.
        21.1  -- Subsidiaries of the Registrant.
        23.1  -- Consent of Arthur Andersen LLP.
        23.2  -- Consent of Richard A. Eisner & Company, LLP.
        23.3  -- Consent of Dewey Ballantine (contained in Exhibit 5.1).*
        24.1  -- Power(s) of Attorney (included on signature page).
        27    -- Financial Data Schedule.
</TABLE>
 
- ---------------
* To be filed by amendment.
+ Confidential treatment will be requested.
 
  (b) Financial Statement Schedules
      None
 
ITEM 17.  UNDERTAKINGS
 
     The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any
 
                                      II-3
<PAGE>   91
 
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
 
     The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities Act
     of 1933, the information omitted from the form of prospectus filed as part
     of this registration statement in reliance upon Rule 430A and contained in
     a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     registration statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act of 1933, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new registration statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.
 
                                      II-4
<PAGE>   92
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York, on June 20, 1996.
 
                                          N2K INC.
 
                                               By     /s/  LAWRENCE L. ROSEN
                                                      Lawrence L. Rosen,
                                               Chairman of the Board and Chief
                                                        Executive Officer
 
                               POWER OF ATTORNEY
 
     Know All Men By These Presents that each person whose signature appears
below under the heading "Signature" constitutes and appoints Jonathan V. Diamond
and Bruce Johnson his true and lawful attorneys-in-fact and agents, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
to this Registration Statement, including post-effective amendments, and to file
the same, with all exhibits thereto, and all documents in connection therewith,
including, without limitation, any registration statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorneys-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 20th day of June, 1996.
 
<TABLE>
<CAPTION>
                  SIGNATURE                                         TITLE
- ---------------------------------------------    --------------------------------------------
<C>                                              <S>
                    /s/  LAWRENCE L.             Chairman of the Board,
                     ROSEN                         Chief Executive Officer and Director
              Lawrence L. Rosen                    (Principal Executive Officer)
                    /S/  Jonathan V.             Vice Chairman and Director
                    Diamond
             Jonathan V. Diamond
               /s/  ROBERT DAVID GRUSIN          Vice Chairman and Director
             Robert David Grusin
                       /s/  JAMES E.             President, Chief Operating Officer and
                     COANE                         Director
               James E. Coane
                        /s/  BRUCE               Vice President, Secretary and Chief
                    JOHNSON                        Financial Officer (Principal Accounting
                Bruce Johnson                      Officer and Principal Financial Officer)
                      /s/  ROBERT C.             Director
                    HARRIS
            Robert C. Harris, Jr.
                  /s/  SUSANNE HARRISON          Director
              Susanne Harrison
</TABLE>
 
                                      II-5
<PAGE>   93
 
                                 EXHIBITS INDEX
 
<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                                 DESCRIPTION                                 FILED
- ----------------  ---------------------------------------------------------------    -----------
<S>               <C>                                                                <C>
        1.1   --  Form of Underwriting Agreement.*...............................
        3.1   --  Form of Certificate of Incorporation of the Registrant, as
                  amended........................................................     Electronic
        3.2   --  Form of Bylaws of the Registrant, as amended...................     Electronic
        4.1   --  Specimen of Certificate for Common Stock.*.....................
        4.2   --  1987 Employee Incentive Stock Option Plan of the Company.......     Electronic
        4.3   --  1996 Stock Option Plan of the Company.*........................
        4.4   --  1996 Employee Stock Purchase Plan.*............................
        4.5   --  Note Purchase Agreement dated October 30, 1987 between the
                  Company and Gary M. Lauder.....................................     Electronic
        4.6   --  Form of Series A Preferred Stock Purchase Agreement............     Electronic
        4.7   --  Form of Series C Preferred Stock Purchase Agreement............     Electronic
        4.8   --  Form of Series D Preferred Stock Purchase Agreement............     Electronic
        4.9   --  Form of Series E Preferred Stock Purchase Agreement............     Electronic
        4.10  --  Form of Series F Preferred Stock Purchase Agreement............     Electronic
        4.11  --  Registration Rights Agreement dated as of February 13, 1996
                  among the Company and the Stockholders of New York N2K.........     Electronic
        4.12  --  Warrant Agreement dated as of February 13, 1996 between N2K
                  Inc.
                  and Unterberg Harris...........................................     Electronic
        5.1   --  Opinion of Dewey Ballantine.*..................................
        10.1  --  Employment Agreement effective as of February 13, 1996 between
                  the Company and Lawrence L. Rosen..............................     Electronic
        10.2  --  Employment Agreement effective as of February 13, 1996 between
                  the Company and Jonathan V. Diamond............................     Electronic
        10.3  --  Employment Agreement effective as of February 13, 1996 between
                  the Company and Robert David Grusin............................     Electronic
        10.4  --  Employment Agreement dated as of May 1, 1987 between the
                  Company
                  and James E. Coane.............................................     Electronic
        10.5  --  Employment Agreement dated as of February 8, 1988 between the
                  Company and Bruce Johnson......................................     Electronic
        10.6  --  Agreement re: Revolving Line of Credit with CoreStates Bank,
                  N.A. (f.k.a. Meridian Bank).*..................................
        10.7  --  Letter Agreement dated June 3, 1996 between the Company and
                  Rocktropolis Enterprises, LLC..................................     Electronic
        10.8  --  Lease Agreement dated April 26, 1991 between the Company and
                  Bebob Associates, as amended...................................     Electronic
        10.9  --  Lease Agreement dated September 7, 1995 between New York N2K
                  and 55 Broad Street Company....................................     Electronic
        10.10 --  Agreement dated November 4, 1985 between the Company and
                  CompuServe, as amended.+.......................................     Electronic
        10.11 --  Distributorship Agreement dated August 1, 1992 between the
                  Company and Nifty Corporation.+................................     Electronic
        10.12 --  Discount Agreement dated January 25, 1995 between the Company
                  and Knight-Ridder Information, Inc.+...........................     Electronic
        10.13 --  Small Order Fulfillment Agreement between the Company and
                  Valley Record Distributors.+...................................     Electronic
</TABLE>
<PAGE>   94
 
<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                                 DESCRIPTION                                 FILED
- ----------------  ---------------------------------------------------------------    -----------
<S>               <C>                                                                <C>
        10.14 --  Indemnification Agreement dated as of February 13, 1996 among
                  the Company and the stockholders of New York N2K...............     Electronic
        11.1  --  Statement re: Computation of Per Share Earnings................     Electronic
        21.1  --  Subsidiaries of the Registrant.................................     Electronic
        23.1  --  Consent of Arthur Andersen LLP.................................     Electronic
        23.2  --  Consent of Richard A. Eisner & Company, LLP....................     Electronic
        23.3  --  Consent of Dewey Ballantine (contained in Exhibit 5.1).*.......
        24.1  --  Power(s) of Attorney (included on signature page)..............     Electronic
        27    --  Financial Data Schedule........................................     Electronic
</TABLE>
 
- ---------------
 
* To be filed by amendment.
+ Confidential treatment will be requested.
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{"company-data": {"conformed-name": "N2K INC", "cik": "0000791704", "assigned-sic": "[]", "irs-number": "061455771", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-06603", "film-number": "96584204"}, "business-address": {"street1": "435 DEVON PARK DRIVE", "street2": "SUITE 600", "city": "WAYNE", "state": "PA", "zip": "19087"}}
1
 
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996
                                                     REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
 
                                    N2K INC.
             (Exact name of registrant as specified in its charter)
DELAWARE                            7375                           06-1455771
   (State or other jurisdiction           (Primary Standard                  (I.R.S. Employer
of incorporation or organization)   Industrial Classification Code         Identification No.)
                                               Number)
N2K INC.
                          55 BROAD STREET, 10TH FLOOR
                            NEW YORK, NEW YORK 10004
                                 (212) 378-5555
   (Address, including zip code and telephone number, including area code, of
                   registrant's principal executive offices)
 
                              JONATHAN V. DIAMOND
                                 VICE CHAIRMAN
                                    N2K INC.
                          55 BROAD STREET, 10TH FLOOR
                            NEW YORK, NEW YORK 10004
                                 (212) 378-5555
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
 
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
                          SERVICE, SHOULD BE SENT TO:
FRANK E. MORGAN II, ESQ.                 JULIE M. ALLEN, ESQ.
         DEWEY BALLANTINE               O'SULLIVAN GRAEV & KARABELL, LLP
    1301 AVENUE OF THE AMERICAS               30 ROCKEFELLER PLAZA
     NEW YORK, NEW YORK 10019               NEW YORK, NEW YORK 10112
          (212) 259-8000                         (212) 408-2400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:  As soon
as practicable after the effective date of this Registration Statement.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:  / /
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering:  / /
- ---------------
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:  / /
- ---------------
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box:  / /
 
                        CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
                                                                           PROPOSED
                                                         PROPOSED          MAXIMUM
                                   NUMBER OF SHARES      MAXIMUM          AGGREGATE         AMOUNT OF
      TITLE OF EACH CLASS OF            TO BE         OFFERING PRICE       OFFERING        REGISTRATION
   SECURITIES TO BE REGISTERED      REGISTERED(1)      PER SHARE(2)      PRICE(1)(2)          FEE(3)
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value
  $0.001 per share................     2,990,000           $12           $35,880,000        $12,372.41
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
(1) Includes 390,000 shares which the Underwriters have an option to purchase
     from the Company to cover over-allotments, if any.
 
(2) Estimated solely for purposes of determining the registration fee pursuant
     to Rule 457 under the Securities Act of 1933.
 
(3) Calculated pursuant to Rule 457(a).
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
 
                                    N2K INC.
 
                             CROSS-REFERENCE SHEET
  PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF
                   INFORMATION REQUIRED BY ITEMS OF FORM S-1
FORM S-1
              ITEM NUMBER AND HEADING                        LOCATION IN THE PROSPECTUS
- ----------------------------------------------------  -----------------------------------------
1.  Forepart of the Registration Statement and
        Outside Front Cover Page of Prospectus......  Outside Front Cover Page
  2.  Inside Front and Outside Back Cover Pages of
        Prospectus..................................  Inside Front and Outside Back Cover Pages
  3.  Summary Information, Risk Factors and Ratio of
        Earnings to Fixed Charges...................  Prospectus Summary; Risk Factors
  4.  Use of Proceeds...............................  Prospectus Summary; Use of Proceeds
  5.  Determination of Offering Price...............  Underwriting
  6.  Dilution......................................  Dilution
  7.  Selling Security Holders......................  Not Applicable
  8.  Plan of Distribution..........................  Outside Front Cover Page; Underwriting
  9.  Description of Securities to be Registered....  Description of Capital Stock
 10.  Interests of Named Experts and Counsel........  Not Applicable
 11.  Information With Respect to the Registrant:
      (a)  Description of Business..................  Prospectus Summary; Business
      (b)  Description of Property..................  Business -- Property
      (c)  Legal Proceedings........................  Business -- Legal Proceedings
      (d)  Market Price of and Dividends on the
             Registrant's Common Equity and Related
             Stockholder Matters....................  Outside Front Cover Page; Dividend
                                                      Policy; Selected Consolidated Financial
                                                        Data; Description of Capital Stock;
                                                        Shares Eligible for Future Sale
      (e)  Financial Statements.....................  Consolidated Financial Statements
      (f)  Selected Financial Data..................  Selected Consolidated Financial Data
      (g)  Supplementary Financial Information......  Not Applicable
      (h)  Management's Discussion and Analysis of
             Financial Condition and Results of
             Operations.............................  Management's Discussion and Analysis of
                                                        Financial Condition and Results of
                                                        Operations
      (i)  Changes in and Disagreements with
             Accountants on Accounting and Financial
             Disclosure.............................  Not Applicable
      (j)  Directors and Executive Officers.........  Management
      (k)  Executive Compensation...................  Management
      (l)  Security Ownership of Certain Beneficial
             Owners and Management..................  Principal Stockholders
      (m)  Certain Relationships and Related
             Transactions...........................  Certain Transactions
 12.  Disclosure of Commission Position on
        Indemnification for Securities Act            Not Applicable
        Liabilities.................................
3
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
PROSPECTUS (Subject to Completion)
Dated June 21, 1996
                                2,600,000 SHARES
 
                                     [LOGO]
 
                                    N2K INC.
 
                                  COMMON STOCK
                         ------------------------------
     All of the 2,600,000 shares of Common Stock offered hereby are being sold
by N2K Inc. ("N2K" or the "Company"). Prior to the Offering, there has been no
public market for the Common Stock. The Company intends to apply for quotation
of the Common Stock on the Nasdaq National Market under the trading symbol
"NTKI." It is currently estimated that the initial public offering price will be
between $10.00 and $12.00 per share. See "Underwriting" for certain factors to
be considered in determining the initial public offering price.
                         ------------------------------
        THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
                    BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
                         ------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
    EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
       SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
          COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
              PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
                  IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Underwriting
                                        Price to           Discounts and         Proceeds to
                                         Public           Commissions(1)         Company(2)
- -------------------------------------------------------------------------------------------------
Per Share.......................            $                    $                    $
Total(3)........................            $                    $                    $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
(1) The Company has agreed to indemnify the Underwriters against certain
     liabilities, including liabilities under the Securities Act of 1933. See
     "Underwriting."
 
(2) Before deducting expenses payable by the Company, estimated to be
     $          .
 
(3) The Company has granted the Underwriters an option, exercisable within 30
     days of the date of this Prospectus, to purchase an aggregate of up to
     390,000 additional shares of the Common Stock at the Price to Public, less
     Underwriting Discounts and Commissions, to cover over-allotments, if any.
     If all such additional shares are purchased, the total Price to Public,
     Underwriting Discounts and Commissions and Proceeds to Company will be
     $          , $          and $          , respectively.
                         ------------------------------
     The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York, on or about              , 1996.
 
COWEN & COMPANY
                              OPPENHEIMER & CO., INC.
                                                                UNTERBERG HARRIS
 
             , 1996
4
 
                         ------------------------------
 
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
5
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option
and gives effect to (a) the 1-for-3 reverse stock split of each outstanding
share of Common Stock in N2K Inc., a Pennsylvania corporation, to be effected
prior to the reorganization of N2K Inc. as a Delaware corporation, (b) the
reorganization of N2K Inc. as a Delaware corporation immediately prior to the
date of this Prospectus and (c) the automatic conversion of all outstanding
shares of the Company's Preferred Stock, $.001 par value per share (the
"Preferred Stock"), into an aggregate of 5,867,108 shares of Common Stock upon
the consummation of the Offering (the "Preferred Stock Conversion"). Fiscal year
references are to the respective fiscal year ended December 31.
 
                                  THE COMPANY
 
     N2K is a music entertainment company focused on providing original content,
interactive programming and recorded music using the Internet as a new global
marketing, promotion and distribution medium. By combining its music industry
and technical expertise, N2K has created an interactive, entertaining and
content-rich online environment, which includes its award-winning merchandising
website, Music Boulevard, music genre websites, Jazz Central Station and
Rocktropolis, and individual artist websites for such artists as David Bowie and
the Rolling Stones. These websites provide a comprehensive entertainment and
information resource enabling users to search and sample music and artist
information interactively through sound, video and graphics. Each of the music
genre and individual artist websites features a hotlink directly with Music
Boulevard to facilitate purchases of CDs, cassettes and related merchandise. The
Company plans to introduce its own recorded music label, N2K Encoded Music, with
its first release scheduled for October 1996. N2K expects that all of its N2K
Encoded Music CDs will be enhanced with multimedia capabilities and will be
marketed and sold through the Company's Internet websites as well as through
traditional retail and other distribution channels. The Company believes that
its strategy of combining Internet content, interactive sales and music produced
on its own label will enhance its ability to create compelling music brand
names, address the broadest possible music audience and build a customer base
focused on targeted music interests. The Company believes that its interactive
sales channel will also provide a new targeted advertising, promotion and
distribution medium for the music industry that will reach a global user base
and that this medium will shift the way music is marketed to consumers.
 
     Music Boulevard (WWW.MUSICBLVD.COM) was launched in August 1995, and Jazz
Central Station (WWW.JAZZCENTRALSTATION.COM) was introduced in January 1996.
Jazz Central Station is the official online website for George Wein's Festival
Productions, producer of the JVC Jazz Festivals, and the Monterey Jazz Festival
for 1996. On June 21, 1996, the Company acquired the rock website, Rocktropolis
(WWW.ROCKTROPOLIS.COM), which was launched in June 1995 and which will be
integrated with the Company's existing websites. Additional music genre websites
are scheduled for release in 1996 and 1997. The Company's website strategy is to
build worldwide online communities around specific music genres where people may
socialize with each other and their favorite artists in a personal environment.
The Company believes that organizing its websites by genres, such as rock, jazz
and classical music, parallels traditional radio play formats and consumer
buying patterns and opens the interactive buying experience to the broadest
possible audience. As part of its strategy to provide locally tailored content,
the Company's first foreign language website will be launched in Japan in June
1996. The Company's revenues from its online music entertainment business have
grown from approximately $85,000 in the fourth quarter of 1995 to approximately
$217,000 in the first quarter of 1996. Substantially all of these revenues were
from the sale of CDs and cassettes produced by other labels.
 
     On February 13, 1996, N2K Inc., a developer of online music entertainment
content was merged with and into Telebase Systems, Inc., a provider of online
information services that changed its name to N2K Inc. To date, substantially
all of the Company's revenues have been from its online information retrieval
services. The Company believes that its ability to aggregate content from a wide
variety of sources, its database management skills and the infrastructure
provided by its information services business will enhance N2K's
 
                                        3
6
 
ability to scale the infrastructure to facilitate the Company's growth and to
create proprietary databases for targeted marketing to music consumers. In
addition, the Company continues to serve its online business information
services distributors while also developing web-based software products and
information services for the business and small office/home office ("SOHO")
markets.
 
     The Company believes that its management team brings together a unique
blend of experience in managing music industry and artist relationships,
merchandising recorded music, developing online services and in database
management. Larry Rosen, Dave Grusin and Jon Diamond managed GRP Records
("GRP"), one of the first worldwide record labels to digitally produce music
titles from concept through finished recording. With more than 75 Grammy
nominations and 20 Grammy awards to its credit, GRP became a leading independent
recorded music label and was purchased by MCA Inc. in 1990. Jim Coane and Bruce
Johnson have more than 15 years of combined experience with Telebase developing
and managing database online information services.
 
     The Company's executive offices are located at 55 Broad Street, New York,
New York 10004, and its telephone number at that address is (212) 378-5555.
 
                                  THE OFFERING
 
Common Stock Offered................     2,600,000 shares
 
Common Stock to be outstanding after
the Offering(1).....................     12,421,711 shares
 
Use of Proceeds.....................     The net proceeds from the Offering will
                                           be used by the Company for sales and
                                           marketing, research and development,
                                           working capital and other general
                                           corporate purposes, which may include
                                           acquisitions of or investments in
                                           complementary businesses, products
                                           and technologies.
 
Proposed Nasdaq National Market
Symbol..............................     NTKI
- ------------------------------
 
(1) Based on shares outstanding as of June 21, 1996. Excludes (i) 1,880,952
     shares of Common Stock issuable upon exercise of outstanding options, (ii)
     2,571,403 shares of Common Stock reserved for future grants under the
     Company's stock option and purchase plans and (iii) 135,555 shares of
     Common Stock reserved for issuance pursuant to the exercise of outstanding
     warrants. The weighted average exercise price of all outstanding options
     and warrants is $2.74 per share. See "Management -- Stock Plans,"
     "Description of Capital Stock" and Note 5 of Notes to Consolidated
     Financial Statements.
 
                                        4
7
 
                   SUMMARY CONSOLIDATED FINANCIAL INFORMATION
 
     The following summary financial information should be read in conjunction
with the Consolidated Financial Statements of the Company and the notes thereto,
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
THREE MONTHS ENDED
                                         YEAR ENDED DECEMBER 31,                  MARCH 31,
                                 ---------------------------------------   ------------------------
                                    1993          1994          1995          1995         1996
                                 -----------   -----------   -----------   ----------   -----------
STATEMENT OF OPERATIONS DATA:
  Revenues:
     Entertainment.............  $   --        $   --        $    96,505   $   --       $   216,800
     Information services......   10,360,257    11,391,780    10,976,711    3,204,151     2,514,382
                                 -----------   -----------   -----------   ----------   -----------
                                  10,360,257    11,391,780    11,073,216    3,204,151     2,731,182
                                 -----------   -----------   -----------   ----------   -----------
  Cost of revenues:
     Entertainment.............      --            --             85,176       --           213,003
     Information services......    5,747,293     6,558,541     6,489,472    1,863,647     1,591,641
                                 -----------   -----------   -----------   ----------   -----------
                                   5,747,293     6,558,541     6,574,648    1,863,647     1,804,644
                                 -----------   -----------   -----------   ----------   -----------
       Gross profit............    4,612,964     4,833,239     4,498,568    1,340,504       926,538
                                 -----------   -----------   -----------   ----------   -----------
  Operating expenses:
     Operating and
       development.............    1,350,057     1,777,654     2,267,852      536,721     1,247,573
     Sales and marketing.......    1,213,829     1,364,198     2,575,618      501,172       430,993
     General and
       administrative..........    1,471,150     1,564,658     1,337,731      343,241       507,255
     Charge for purchased
       research and
       development(1)..........      --            --            --            --         4,133,281
                                 -----------   -----------   -----------   ----------   -----------
       Operating income
          (loss)...............      577,928       126,729    (1,682,633)     (40,630)   (5,392,564)
  Interest income..............       43,761        73,359       106,370       27,683        24,904
  Interest expense.............      (82,890)      (48,398)      (18,237)      (3,544)      (16,552)
                                 -----------   -----------   -----------   ----------   -----------
       Income (loss) before
          income taxes.........      538,799       151,690    (1,594,500)     (16,491)   (5,384,212)
  Income taxes.................       33,913         9,280           300          663       --
                                 -----------   -----------   -----------   ----------   -----------
       Net income (loss).......  $   504,886   $   142,410   $(1,594,800)  $  (17,154)  $(5,384,212)
                                  ==========    ==========    ==========    =========    ==========
  Pro forma net loss per common
     share(2)..................                              $     (0.15)  $            $     (0.49)
                                                              ==========                 ==========
  Shares used in computing pro
     forma net loss per common
     share(2)..................                               10,939,989                 10,925,422
                                                              ==========                 ==========
MARCH 31, 1996
                                                         -------------------------------------------
                                                           ACTUAL     PRO FORMA(3)   AS ADJUSTED(4)
                                                         ----------   ------------   ---------------
BALANCE SHEET DATA:
  Working capital......................................  $1,070,133   $ 16,970,133     $42,868,133
  Total assets.........................................   5,806,745     21,706,745      47,604,745
  Stockholders' equity.................................   2,416,338     18,316,338      44,214,338
5
8
 
- ------------------------------
 
(1) On February 13, 1996, N2K Inc., a New York corporation ("New York N2K"),
     which was founded in 1995 as a developer of online music entertainment
     content, was merged with and into Telebase Systems, Inc. ("Telebase"), a
     Pennsylvania corporation formed in 1984 as a provider of online information
     services (the "Merger"). In connection with the Merger, the Company
     incurred a one-time charge for purchased research and development. See
     Notes 1 and 2 of Notes to Consolidated Financial Statements.
 
(2) Reflects the conversion of all outstanding shares of the Company's Preferred
     Stock into Common Stock upon consummation of the Offering. See Note 1 of
     Notes to Consolidated Financial Statements. If the Merger had occurred on
     January 1, 1995, the pro forma results would have been as follows:
THREE MONTHS
                                                           YEAR ENDED             ENDED
                                                        DECEMBER 31, 1995     MARCH 31, 1995
                                                        -----------------     --------------
Unaudited pro forma revenues..................     $11,216,842         $  2,799,809
                                                           ===========          ===========
        Unaudited pro forma net loss..................     $(2,839,579)        $ (1,634,819)
                                                           ===========          ===========
        Unaudited pro forma net loss per Common
          share.......................................     $     (0.26)        $      (0.15)
                                                           ===========          ===========
The above pro forma information for both periods excludes the one-time
    charge of $4.1 million associated with the write-off of purchased research
    and development.
 
(3) Reflects (i) the sale of certain shares of Series E Preferred Stock and
     shares of Series F Preferred Stock subsequent to March 31, 1996, and (ii)
     the automatic conversion of all outstanding shares of the Company's
     Preferred Stock into Common Stock upon consummation of the Offering.
 
(4) Adjusted to give effect to the sale of 2,600,000 shares of Common Stock
     offered hereby at an assumed initial public offering price of $11.00 per
     share and after deducting estimated underwriting discounts and commissions
     and offering expenses. See "Capitalization."
                         ------------------------------
 
     Music Boulevard(R), Telebase(R), EasyNet(R), Corporate EasyNet(R),
ANALY$T(R), ARTIST Gateway(R) and Knowledge Gateway(R) are registered trademarks
of the Company. Jazz Central StationSM and RocktropolisSM are service marks of
the Company. All other trademarks or service marks appearing in this Prospectus
are the property of their respective holders.
 
                                        6
9
 
                                  RISK FACTORS
 
     Prospective purchasers should consider carefully the following risk
factors, in addition to the other information set forth in this Prospectus,
before purchasing any of the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Actual events or results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under this section
entitled "Risk Factors," as well as those discussed in the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and in the other sections of this Prospectus.
 
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE RESULTS
 
     The Company has incurred significant losses and expects to continue to
incur significant losses on a quarterly and annual basis for the foreseeable
future. As of March 31, 1996, the Company had an accumulated deficit of $13.3
million. Since its inception, the Company has incurred costs to develop and
enhance its technology, to create, introduce and enhance its service offerings,
to establish marketing and distribution relationships and to build an
administrative organization. Since the Merger, the Company has continued these
efforts with an emphasis on increased spending for the development, marketing
and sale of its music entertainment services, in particular those offered
through its Music Boulevard, Jazz Central Station and other planned World Wide
Web (the "Web") sites. To date, the Company has derived its revenues primarily
from the provision of online business information and gateway retrieval
services. The Company recently shifted the focus of its business to music
entertainment delivered via the Internet and expects to derive an increasingly
larger portion of its revenues from the music entertainment business, including
from its planned N2K Encoded Music label and sales of advertising on its
music-related websites. Due to the Company's recent shift in business focus, the
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new, unproven and rapidly
evolving markets. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract, retain and motivate
qualified employees, continue to upgrade its technologies and commercialize its
products and services incorporating such technologies. There can be no assurance
that the Company will be successful in addressing such risks. If the Company is
not successful in developing and expanding its music entertainment business,
including its planned N2K Encoded Music label and sales of advertising on its
music-related websites, the Company's ability to achieve profitability would be
materially adversely affected. In addition, the Company currently intends to
increase substantially its operating expenses to develop new music genre sites,
to enhance existing sites, to fund increased sales and marketing and to expand
its music entertainment operations. To the extent that such expenses precede or
are not subsequently followed by increased revenues, the Company's business,
results of operations and financial condition will be materially adversely
affected. There can be no assurance that the Company will ever be able to
achieve or maintain profitability on a quarterly or annual basis in the future.
See "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
 
DEPENDENCE ON THE INTERNET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR
COMMERCE AND ADVERTISING
 
     Use of the Internet by consumers is at a very early stage of development,
and market acceptance of the Internet as a medium for commerce and advertising
is subject to a high level of uncertainty. The rapid growth of global commerce
and the exchange of information on the Internet and other online networks is new
and evolving, making it difficult to predict whether the Internet will prove to
be a viable commercial marketplace. The Company believes that its future success
will depend on its ability to significantly increase revenues from its music
entertainment operations, which will require the development and widespread
acceptance of the Internet and online services as a medium for commerce and
advertising. In particular, the Company's future financial success will be
dependent on profits from the sale of recorded music under its own label, N2K
 
                                        7
10
 
Encoded Music, and the sale of advertising on its Internet websites. There can
be no assurance that the Internet will be a successful retailing channel. The
Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure, such as reliable network
backbones, or complementary services, such as high speed modems and security
procedures for financial transactions. Consumer concern over Internet security
has been, and could continue to be, a barrier to commercial activities requiring
consumers to send their credit card information over the Internet. The Internet
has experienced, and is expected to continue to experience, significant growth
in the number of users and amount of traffic. There can be no assurance that the
Internet infrastructure will continue to be able to support the demands placed
on it by sustained growth. In addition, the viability of the Internet may prove
uncertain due to delays in the development and adoption of new standards and
protocols (for example, the next generation Internet Protocol) to handle
increased levels of Internet activity or due to increased government regulation.
If use of the Internet does not continue to grow, or if the necessary Internet
infrastructure or complementary services are not developed to effectively
support growth that may occur, the Company's business, results of operations and
financial condition could be materially adversely affected. In addition, in
order for the Company to generate advertising revenues, advertisers and
advertising agencies must direct a portion of their budgets to the Internet and,
specifically, to the Company's Internet websites. The Company has just recently
begun to sell advertising on its websites and has not recognized material
advertising revenues to date. There can be no assurance that the Company will be
successful in generating significant advertising revenues to date and the
failure to do so would have a material adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
advertisers and advertising agencies will accept the Internet as a medium. If
Internet advertising is not widely accepted by advertisers and advertising
agencies, the Company's business, results of operations and financial condition
could be materially adversely affected. See "Business -- Industry
Overview -- The Internet."
 
UNCERTAIN ACCEPTANCE OF THE COMPANY'S INTERNET CONTENT
 
     The Company's future success will be significantly dependent upon its
ability to create and deliver entertaining and compelling Internet music-related
content in order to attract users to its websites to purchase recorded music and
related merchandise and to attract advertisers to the websites. The Company
launched its first music website, Music Boulevard, in August 1995 and has
limited experience in the online music entertainment business. There can be no
assurance that the Company's content will be attractive to a sufficient number
of users to generate significant merchandising and advertising revenues. There
can also be no assurance that the Company will be able to anticipate, monitor
and successfully respond to rapidly changing consumer tastes and preferences so
as to continually attract a sufficient number of users to its websites. If the
Company is unable to develop Internet content that allows it to attract, retain
and expand a loyal user base, its business, results of operations and financial
condition will be materially adversely affected.
 
COMPETITION
 
     The market for Internet and online content and service providers is highly
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of websites on the Internet competing for consumers'
attention and spending has proliferated. With no substantial barriers to entry,
the Company expects that competition will continue to intensify. In addition to
competing with numerous independent Internet retailers and traditional music
retail chains with websites on the Internet, the Company competes with
traditional retail stores, including chains and megastores, catalog
merchandisers, music clubs and telephone retailers. N2K Encoded Music will
compete with the major, and other independent, record labels. The Company
believes that the primary competitive factors in providing music entertainment
products and services via the Internet are name recognition, variety of
value-added services, ease of use, price, quality of service, availability of
customer support, reliability, technical expertise and experience. The Company's
success in this market will depend heavily upon its ability to provide high
quality, entertaining content, along with cutting-edge technology and
value-added Internet and online services. Other factors that will affect the
Company's success in this market include the Company's continued ability to
attract experienced marketing, sales and management talent, and the expansion of
global support, training and field service capabilities. The Company's failure
to compete successfully in the online music entertainment business would have a
material
 
                                        8
11
 
adverse effect on the Company's business, results of operations and financial
condition. In addition, the competition for advertising revenues both on the
Internet websites and in more traditional media is intense. To the extent the
Company is not able to attract significant sources of revenues from paid
advertisements on its websites, the Company's business, results of operations
and financial condition will be materially adversely affected.
 
     The market for online information services is both highly competitive and
highly fragmented. As the Company has no exclusive relationships with any of its
information suppliers, many of the Company's competitors offer, or could offer,
content that is similar or the same as that offered by the Company, which could
adversely affect the Company's distribution agreements and utilization by its
end users. In addition, the growing reach and use of the Internet has further
intensified competition in this industry. Consumers have gained free access to
certain information provided directly on the Internet by certain content
providers. To the extent that content providers, including but not limited to
the Company's current suppliers, provide information to users at a lower cost
than the Company or at minimal or no cost, the Company's business, results of
operations and financial condition could be materially adversely affected.
 
     Many of the Company's current and potential competitors in the music
entertainment and online information services businesses have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and larger existing customer bases than the Company. In
addition, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products or services
than the Company. There can be no assurance that the Company will be able to
compete successfully.
 
DEPENDENCE ON KEY CUSTOMERS
 
     The Company presently sells its information services, which accounted for
approximately 99.1% of its revenues in 1995, on a non-exclusive basis to large
companies in the online service industry. In the three months ended March 31,
1996, CompuServe Incorporated ("CompuServe") and NIFTY Corporation ("NIFTY")
accounted for $1.9 million and $301,000, representing 68.9% and 11.0%,
respectively, of revenues. In 1995, CompuServe and NIFTY accounted for $8.5
million and $1.2 million, representing 76.3% and 10.5%, respectively, of
revenues. Similarly, in 1994, CompuServe and NIFTY accounted for $8.5 million
and $1.1 million, representing 74.5% and 9.6%, respectively, of the Company's
revenues. As of March 31, 1996, the Company had accounts receivable from
CompuServe and NIFTY of $1.3 million and $95,000, respectively. As of December
31, 1995, the Company had accounts receivable from CompuServe and NIFTY of $1.2
million and $88,000, respectively. As of December 31, 1994, the Company had
accounts receivable from CompuServe and NIFTY of $1.5 million and $69,000,
respectively. The proliferation of and competition among content providers has
intensified and many content providers are delivering information directly to
consumers on the Internet at minimal or no cost. At the same time, advances in
technology have made it easier for online service providers to develop
information retrieval interfaces. Since the Company does not have any long-term
agreements with, or commitments from, CompuServe or NIFTY, no assurance can be
given that CompuServe and NIFTY will remain customers of the Company. The loss
of either CompuServe or NIFTY as Company customers would have a material adverse
effect on the Company's business, results of operations and financial condition.
Further, the Company relies on the marketing efforts of CompuServe and NIFTY to
the end user. To the extent that CompuServe or NIFTY change their offerings or
strategy, reduce their marketing efforts or experience system failures, the
Company's online information services business may be materially adversely
affected. See "Business -- N2K Information Services."
 
DEPENDENCE ON KEY SUPPLIERS
 
     In the Company's information services business, Knight-Ridder Information,
Inc. ("Knight-Ridder"), a database content provider, accounted for 53.1%, 60.2%
and 59.3% of the cost of revenues for the three months ended March 31, 1996 and
for the years ended December 31, 1995 and 1994, respectively. The Company
renegotiates its supply agreement with Knight-Ridder on an annual basis. No
assurance can be made that Knight-Ridder will continue its supply relationship
with the Company. The termination of such relationship or
 
                                        9
12
 
a material increase in the cost of Knight-Ridder's services would have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
     In its music entertainment business, the Company currently has a contract
with Valley Record Distributors ("Valley"), which is currently the Company's
single-source provider of order fulfillment for direct-to-consumer recorded
music products. The Company has no fulfillment operation or facility of its own
and, accordingly, is dependent upon maintaining its existing relationship with
Valley or establishing a new fulfillment relationship with a comparable
fulfillment operation. There can be no assurance that the Company will maintain
its relationship with Valley beyond the term of its existing agreement, which
was entered into in May 1995 for a three-year period. The termination of such
relationship would, absent establishing a substitute relationship with one or
more of the few other fulfillers in the industry, have a material adverse effect
on the Company's business, results of operations and financial condition. The
Company believes that alternative suppliers of fulfillment services would be
available on terms satisfactory to the Company should its relationship with
Valley terminate. Nevertheless, an unanticipated termination of the Company's
relationship with Valley, particularly during the fourth quarter in which a high
percentage of recorded music sales are made, could materially adversely affect
the Company's results of operations for the quarter in which such termination
occurred even if the Company was able to establish a relationship with an
alternative fulfillment house. In addition, to the extent that Valley does not
have sufficient capacity and is unable to satisfy on a timely basis increasing
requirements of its customers, including the Company, such capacity constraint
would have a material adverse effect on the Company's business, results of
operations and financial condition.
 
MANAGEMENT OF GROWTH; CHANGING BUSINESS FOCUS; ACQUISITIONS
 
     The Company has recently experienced a period of rapid and significant
growth, including a substantial increase in the number of its employees. Such
growth has placed, and may continue to place, significant demands on the
Company's management, operations and systems. In addition, the Company has
shifted the focus of its business operations to music entertainment. The Company
has only recently consummated the Merger and acquired the rock website,
Rocktropolis. In addition, the Company is launching a graphical user interface
for Music Boulevard on July 1, 1996. To the extent that the Company continues to
grow internally or through additional acquisitions, the Company will be faced
with risks, including risks associated with the assimilation of new operations,
sites and personnel, the diversion of resources from the Company's existing
business and the inability of management to integrate any acquired businesses.
The Company's ability to compete effectively will depend, in part, upon its
ability to overcome these risks and to revise, improve and effectively use its
operational, management, marketing and financial systems, both domestically and
on an international basis, as necessitated by changes in the Company's business.
There can be no assurance that the Company will be able to effectively manage
such growth and changes. Any failure of the Company to effectively manage its
growth and to respond to changes in its business focus would have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
RISKS INHERENT IN THE RECORDED MUSIC INDUSTRY AND RECORD LABEL LAUNCH
 
     The recorded music industry, like other creative industries, involves a
substantial degree of risk. Each recording is an individual artistic work, and
its commercial success is primarily determined by consumer taste, which is
unpredictable and constantly changing. Accordingly, there can be no assurance as
to the financial success of any particular release, the timing of any such
success or the popularity of any particular artist, or the Company's ability to
attract and sign artists to N2K Encoded Music. Furthermore, the Company believes
that it is standard practice in the recorded music industry for record companies
to pay substantial advances to artists. If the Company were to pay its artists
such advances, it could incur significant expenses which could materially
adversely affect the Company's results of operations. If the Company were not to
pay such advances, it would be competing for artistic talent at a disadvantage
to other record labels that do pay such advances. The Company has not yet
produced or introduced any titles under the N2K Encoded Music label. There can
be no assurance that the Company will be able to generate sufficient revenues
from successful releases to cover the costs of unsuccessful releases. The
Company has no distribution arrangement for N2K Encoded Music. The Company is
presently evaluating potential distribution arrangements. The success of the
 
                                       10
13
 
Company's N2K Encoded Music is dependent upon developing and maintaining such
distribution relationships. Management believes that it will be able to develop
and maintain such relationships on terms satisfactory to the Company. The
failure of the Company to develop and/or maintain such distribution
relationships would have a material adverse effect on the Company's business,
results of operations and financial condition. The record industry is dominated
by a small number of large record companies that have significantly greater
experience and financial, marketing and distribution resources than the Company.
There can be no assurance of the Company's ability to complete effectively in
that market. The failure of the Company to establish and grow N2K Encoded Music
would have a material adverse on the Company's growth, financial condition and
results of operations. See "Business -- Entertainment Products and
Services -- Planned Record Label."
 
EVOLVING MARKETS FOR INFORMATION SERVICES
 
     The Company's information services are offered in markets that are rapidly
evolving and are characterized by an increasing number of market entrants that
have introduced or developed services addressing information search and
retrieval requirements over private and public networks, online services and the
Internet. At the same time, many content providers, particularly general
reference content providers, have begun to provide direct access to information
on the Internet at minimal or no cost. The Company's revenues from general
reference information services have declined. In response to changes in the
information services market, the Company has unbundled its services, reduced its
prices and re-focused its marketing strategy to emphasize premium-priced
databases and new Web-based products and services for the business and SOHO
markets. There can be no assurance that the Company will be able to maintain or
grow its information services business. Failure to maintain or grow its
information services business would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's success depends to a significant extent on the continued
contributions of its senior management team, and technical and marketing
personnel. In particular, the Company's music entertainment business is highly
dependent upon the services and music industry expertise of Larry Rosen, Dave
Grusin and Jon Diamond. The Company does not maintain "key man" life insurance
for any of its employees. The Company does have employment agreements with
Messrs. Rosen, Diamond and Grusin and certain other members of senior
management. However, such employment agreements do not necessarily assure the
services of such employees. The Company's success also depends on its ability to
attract and retain additional qualified employees. Competition for qualified
personnel is intense and there are a limited number of persons with knowledge of
and experience in the Internet service industry. Despite employment agreements
and non-competition arrangements with certain members of management, the
Company's employees may voluntarily terminate their employment with the Company
at any time. There can be no assurance that the Company will be able to retain
its key personnel. The loss of one or more key employees could have a material
adverse effect on the Company. See "Business -- Employees" and "Management."
 
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
 
     The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including demand
for the Company's services, the timing of the introduction or enhancement of
websites and services by the Company and its competitors, market acceptance of
new services, the mix of products and services sold, seasonality of the
information services markets and recorded music industry, seasonality in
advertising sales, the timing of new releases by the Company's planned record
label, technical difficulties and system downtime and general economic
conditions. The Company has historically experienced decreases in revenues and
net income from its information retrieval services during both the third and
fourth fiscal quarters. In addition, the Company anticipates that revenues from
its music entertainment business will track traditional consumer music-buying
habits. Therefore, music revenues are expected to decline during the summer
months of the second and third fiscal quarters and to increase during
 
                                       11
14
 
the late fourth-quarter peak holiday season. As a result, the Company believes
that period-to-period comparisons of its results of operations are not and will
not necessarily be meaningful and should not be relied upon as an indication of
future performance. Due to all of the foregoing factors, it is possible that in
some future quarter or quarters the Company's operating results will be below
the expectations of securities analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
RISKS ASSOCIATED WITH GLOBAL EXPANSION
 
     A key component of the Company's strategy is its planned expansion into
global markets. There can be no assurance that the Company will be able to
successfully market, sell and distribute its services in global markets due to
legal, contractual and practical considerations. The Company does not currently
have any overseas distribution facility or arrangement and there can be no
assurance that the Company will be able to expand its global presence. In
addition, there are certain risks inherent in doing business on a global level,
such as unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, difficulties in protecting intellectual property rights, longer
payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates and potentially adverse tax
consequences, which could adversely impact the success of the Company's global
operations. There can be no assurance that one or more of such factors will not
have a material adverse effect on the Company's future global operations, and
consequently, on the Company's business, results of operations and financial
condition.
 
RISK OF SYSTEM FAILURE OR INADEQUACY
 
     The Company's operations are dependent on its ability to maintain its
computer and telecommunications equipment in effective working order and to
protect its systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. In addition, the growth of the
Company's customer base, generated through its music entertainment and/or
information services, may strain or exceed the capacity of its computer and
telecommunications systems and lead to degradations in performance or systems
failure. From time to time, the Company has experienced capacity constraints and
failure of its information systems which has resulted in decreased levels of
service delivery or interruptions in service to its customers. While the Company
continually reviews and seeks to upgrade its technical infrastructure and
provides for certain system redundancies and backup power to limit the
likelihood of systems overload or failure, any damage, failure or delay that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, substantially all of the Company's computer and telecommunications
operations, including its processing operations, are located at its facility in
Wayne, Pennsylvania. Although the Company maintains insurance, such insurance
may not be adequate to compensate the Company for all property damage and
business interruption losses that may occur.
 
UNCERTAIN ACCESS TO CONTENT
 
     The Company believes that it will be necessary to continue to license both
information and entertainment content from content providers. While the Company
intends to continue adding new content to its entertainment and information
services, there can be no assurance the Company will be able to maintain its
current agreements with content providers or enter into agreements with
additional content providers. Failure to do so may have a material adverse
affect on the Company's business, results of operations and financial condition.
 
SECURITY RISKS
 
     Despite the implementation of network security measures by the Company, its
infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by its customers or others. Computer viruses,
break-ins or other security problems could lead to misappropriation of
proprietary information and interruptions, delays or cessation in service to the
Company's customers. Moreover, until
 
                                       12
15
 
more comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet as a merchandising medium.
 
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
 
     The Company's success will depend upon its ability to develop and provide
new services that meet customers' changing requirements. The music entertainment
industry has been characterized by significant technological changes, such as
the introduction of CDs which have had a significant impact on the industry and
industry participants, and further technological changes are expected to occur.
The Internet service market is characterized by rapidly changing technology,
evolving industry standards, changes in customer needs and frequent new service
and product introductions. The Company's future success will depend, in part, on
its ability to effectively use leading technologies, to continue to develop its
technological expertise, to enhance its current services, to develop new
services that meet changing customer needs and to influence and respond to
emerging industry standards and other technological changes on a timely and
cost-effective basis. See "Business -- N2K Technology."
 
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
 
     The Company is subject, both directly and indirectly, to various laws and
governmental regulations relating to its business. The Company believes it is
currently in compliance with such laws and that they do not have a material
impact on its operations. Moreover, there are currently few laws or regulations
directly applicable to access to or commerce on commercial online services or
the Internet. However, due to the increasing popularity and use of commercial
online services and the Internet, it is possible that a number of laws and
regulations may be adopted with respect to commercial online services and the
Internet. Such laws and regulations may cover issues such as user privacy,
pricing and characteristics and quality of products and services. The
Telecommunications Act of 1996, which was recently enacted, imposes criminal
penalties for transmission of or allowing access to certain obscene
communications over the Internet and other computer services and contains
additional provisions intended to protect minors. Such provisions of the Tele-
communications Act have been challenged on constitutional and other grounds and
the outcome of such challenges is uncertain. The enactment of the
Telecommunications Act, and any similar laws or regulations in the future, may
decrease the growth of commercial online services and the Internet, which could
in turn decrease the demand for the Company's services and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
applicability to commercial online services and the Internet of existing laws
governing issues such as property ownership, libel and personal privacy is
uncertain and could expose the Company to substantial liability for which the
Company might not be indemnified by content providers. See "-- Liability for
Information Retrieved from the Internet." The Company believes that its use of
material on its websites is protected under current provisions of copyright law.
However, legal rights to certain aspects of online and Internet content and
commerce are not clearly settled. There can be no assurance that the Company
will be able to continue to maintain rights to information, including
downloadable music samples and artist, record and other information. The failure
to be able to offer such information would have a material adverse effect on the
Company's business, results of operations and financial condition.
 
LIABILITY FOR INFORMATION RETRIEVED FROM THE INTERNET
 
     Due to the fact that materials may be downloaded by the online or Internet
services operated by the Company or the Internet access providers with which it
has relationships and may be subsequently distributed to others, there is a
potential that claims will be made against the Company for defamation,
negligence, copyright or trademark infringement or other theories based on the
nature and content of such materials. Such claims have been brought, and
sometimes successfully pressed, against online services in the past. In
addition, the Company could be exposed to liability with respect to the
selection of listings that may be accessible through the Company's branded
products and websites. For example, claims could be made against the Company if
material deemed inappropriate for viewing by children could be accessed through
Music Boulevard. Although the Company carries general liability insurance, the
Company's insurance may not cover
 
                                       13
16
 
potential claims of this type or may not be adequate to cover all costs incurred
in defense of potential claims or to indemnify the Company for all liability
that may be imposed. Any costs or imposition of liability that is not covered by
insurance or in excess of insurance coverage could have a material adverse
effect on the Company's business, results of operations and financial condition.
 
CONTROL BY MANAGEMENT
 
     The Company's executive officers and directors and their respective
affiliates will beneficially own an aggregate of 39.3% of the Company's
outstanding shares of Common Stock after the Offering (38.0% if the
Underwriters' over-allotment option is exercised in full). Such stockholders, if
voting together, may, as a practical matter, have sufficient voting power to
elect the board of directors of the Company (the "Board of Directors"), exercise
significant control over the business, policies and affairs of the Company and,
in general, determine the outcome of any corporate transaction or other matters
submitted to the stockholders for approval, such as any amendment to the
certificate of incorporation of the Company (the "Certificate of
Incorporation"), any merger, consolidation, sale of all or substantially all of
the Company's assets or "going private" transactions and prevent or cause a
change in control of the Company, all of which may adversely affect the market
price of the Common Stock. See "Principal Stockholders."
 
ANTI-TAKEOVER PROVISIONS
 
     Certain provisions of the Delaware General Corporation Law (the "Delaware
GCL") may delay, discourage or prevent a change in control of the Company. Such
provisions may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price and the
voting and other rights of the holders of Common Stock. In addition, the Board
of Directors has the authority without action by the Company's shareholders to
fix the rights, privileges and preferences of and to issue shares of the
Company's preferred stock, par value $.001 per share (the "Preferred Stock"),
which may have the effect of delaying, deterring or preventing a change in
control of the Company. See "Description of Capital Stock -- Preferred Stock"
and "-- Anti-Takeover Effects of Delaware Law."
 
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
 
     Prior to the Offering, there has been no public market for the Common
Stock. The Company has applied for listing of the Common Stock on the Nasdaq
National Market under the trading symbol "NTKI." There can be no assurance,
however, that an active public market will develop for the Common Stock. The
initial public offering price will be determined through negotiations between
the Company and the Representatives of the Underwriters, and may not be
indicative of the market price for the Common Stock after the completion of the
Offering. Among the factors to be considered in such negotiations are prevailing
market conditions, the results of operations of the Company in recent periods,
the market capitalizations and stages of development of other companies which
the Company and the Representatives of the Underwriters believe to be comparable
to the Company, estimates of the business potential of the Company, the present
state of the Company's development and other factors, if any, deemed relevant.
See "Underwriting."
 
     Moreover, the trading price of the Company's Common Stock could be subject
to fluctuations in response to quarterly variations in results of operations,
announcements of technological innovations or new services or products by the
Company or its competitors, changes in financial estimates by securities
analysts and other events or factors. See "-- Potential Fluctuations in
Quarterly Results; Seasonality." Recent history relating to the market prices of
other newly public companies indicates that the market price of the Company's
Common Stock following the Offering may be highly volatile. At various times,
the stock market has experienced volatility that has particularly affected the
market prices for stock of particular industry groups, such as technology
companies, particularly Internet-related companies, often without regard to a
particular company's operating results.
 
                                       14
17
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
 
     After the completion of the Offering, 12,421,711 shares of Common Stock
will be outstanding. Of such shares, the 2,600,000 shares sold pursuant to the
Offering will be tradeable without restriction by persons other than
"affiliates" of the Company. The remaining 9,821,711 shares of Common Stock to
be outstanding after the Offering are "restricted securities" within the meaning
of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act")
and may not be publicly resold, except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, including that provided by Rule 144 promulgated under the
Securities Act. 4,941,777 shares of Common Stock will be available for immediate
resale upon the consummation of the Offering without restriction pursuant to the
exemption provided by Rule 144(k), subject in certain cases to expiration of the
180-day lock-up period. The directors and executive officers of the Company and
other stockholders of the Company, who collectively hold      shares, or
approximately      %, of the outstanding shares of Common Stock, have agreed not
to, directly or indirectly, offer, sell, assign, transfer, encumber, pledge,
contract to sell, grant an option to purchase or otherwise dispose of any Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Cowen & Company. Upon expiration of the 180-day period,
4,899,983 shares of Common Stock will be eligible for immediate resale without
restriction under the Securities Act, subject, in certain cases, to certain
volume, timing and other requirements of Rule 144 promulgated under the
Securities Act. The Company intends to file one or more Registration Statements
on Form S-8 immediately following the Offering, registering under the Securities
Act an aggregate of 4,452,354 shares of Common Stock covered by the Company's
stock option and purchase plans. In addition, certain stockholders of the
Company are entitled to both demand and incidental registration rights with
respect to 5,808,179 shares of Common Stock. The Company has obtained the
consent of stockholders holding      shares, or      %, of the Common Stock
entitled to demand registration rights any time 180 days after the date of this
Prospectus to delay the effectiveness of any registration statement pursuant to
a demand request until the expiration of the 270-day period after the date of
this Prospectus, to the extent requested by the Representatives. After the
expiration of the 180-day period or the 270-day period, as applicable, such
holders may exercise such rights, which could result in a large number of shares
being sold in the public market and could have an adverse effect on the market
price for the Common Stock. No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sale, will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock.
See "Description of Capital Stock -- Registration Rights," "Shares Eligible for
Future Sale" and "Underwriting."
 
SUBSTANTIAL DILUTION
 
     Purchasers of the Common Stock offered hereby will experience immediate
dilution in the pro forma net tangible book value per share of $7.45 at an
assumed initial public offering price of $11.00 per share and after deducting
estimated underwriting discounts and commissions and offering expenses. In
addition, as of June 21, 1996, the Company had granted warrants to purchase
135,555 shares of Common Stock, and options to purchase 1,880,952 shares of
Common Stock. If such warrants and options are exercised in full, purchasers of
the Common Stock offered hereby would experience an immediate and substantial
dilution in the net tangible book value per share of $7.56. See "Dilution."
 
ABSENCE OF DIVIDENDS
 
     The Company has never declared or paid any dividends on the Common Stock
and does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
 
POSSIBLE NEED FOR ADDITIONAL FUNDS
 
     Based on current levels of operations and planned growth, the Company
anticipates that its existing capital resources, together with the proceeds of
the Offering, will enable it to maintain its operations for at least two years
from the date of this Prospectus. However, the Company may require additional
funds to sustain and expand its sales and marketing and research and development
activities, particularly if a well-
 
                                       15
18
 
financed competitor emerges or if there is a shift in the type of Internet or
online information services that are developed and ultimately receive customer
acceptance. Adequate funds for these and other purposes on terms acceptable to
the Company, whether through additional equity financing, debt financing or
other sources, may not be available when needed or may result in significant
dilution to existing stockholders. The inability to obtain sufficient funds from
operations or external sources would have a material adverse effect on the
Company's business, results of operations and financial condition. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
 
NO SPECIFIC USE OF PROCEEDS
 
     The Company has not designated any specific use for the net proceeds from
the Offering of the 2,600,000 shares of Common Stock. Rather, the Company
intends to use the net proceeds primarily for sales and marketing, research and
development, working capital and other general corporate purposes, which may
include acquisitions and strategic investments. Accordingly, management will
have significant flexibility in applying the net proceeds of the Offering. See
"Use of Proceeds."
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the sale of the Common Stock offered
hereby, at an assumed initial public offering price of $11.00 per share and
after deducting estimated underwriting discounts and commissions and offering
expenses, are estimated to be approximately $25.9 million (approximately $29.9
million if the Underwriters' over-allotment option is exercised in full). The
net proceeds from the Offering will be utilized for sales and marketing,
research and development, working capital and other general corporate purposes.
See "Risk Factors -- No Specific Use of Proceeds." From time to time, in the
ordinary course of business, the Company evaluates possible acquisitions of or
investments in businesses, products and technologies that are complementary to
those of the Company. A portion of the net proceeds may therefore be used to
fund acquisitions or investments. The Company currently has no arrangements,
agreements or understandings, and is not engaged in active negotiations, with
respect to any such acquisition or investment.
 
     Pending the application of the net proceeds from the Offering, the Company
intends to invest the net proceeds in short-term, investment-grade,
interest-bearing instruments or money market funds. To the extent necessary to
avoid being subject to the registration requirements of the Investment Company
Act of 1940, as amended, the Company would invest the balance in U.S. Treasury
obligations. Returns on such investments may be less than those that might
otherwise result if the Company were able to use such funds immediately in its
operations.
 
                                DIVIDEND POLICY
 
     The Company has never declared or paid any dividends on its Common Stock.
The Company does not anticipate paying any dividends on the Common Stock in the
foreseeable future and intends to retain all available funds for use in the
operation and development of its business. The Board of Directors intends to
review the Company's dividend policy from time to time. Any payment of dividends
in the future will be at the discretion of the Board of Directors and will be
dependent on the earnings and financial requirements of the Company and other
factors, including restrictions imposed by the Delaware GCL on the payment of
dividends, covenants restricting the payment of dividends in future loan
documents and such other factors as the Board of Directors deems relevant.
 
                                       16
19
 
                                    DILUTION
 
     The pro forma net tangible book value of the Company at March 31,1996 was
$18.0 million or $1.85 per share. Pro forma net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of shares of Common Stock
outstanding on a pro forma basis, after giving effect to (i) the sale of certain
shares of Series E Preferred Stock and shares of Series F Preferred Stock
subsequent to March 31, 1996 and (ii) the automatic conversion of all
outstanding shares of the Company's Preferred Stock into Common Stock upon the
consummation of the Offering, but without giving effect to the acquisition of
the rock website, Rocktropolis. Without giving effect to any changes in pro
forma net tangible book value after March 31, 1996, other than to give effect to
the sale of the Common Stock offered hereby at an assumed public offering price
of $11.00 per share and after deducting estimated underwriting discounts and
commissions and offering expenses, the Company's adjusted pro forma net tangible
book value as of March 31, 1996 would have been $43.9 million or $3.55 per share
representing an immediate increase in net tangible book value of $1.70 per share
to the existing stockholders and an immediate dilution to new investors of $7.45
per share. The following table illustrates the dilution to new investors:
Assumed initial public offering price per share.......................          $11.00
      Pro forma net tangible book value per share before the Offering.....  $1.85
      Net increase in pro forma net tangible book value per share
         attributable to the Offering.....................................   1.70
                                                                            -----
    Pro forma net tangible book value per share after the Offering........            3.55
                                                                                    ------
    Dilution per share to new investors in the Offering(1)................          $ 7.45
                                                                                    ======
- ------------------------------
 
(1) Based on the assumptions set forth above, the dilution to new investors
     would be $7.56 per share if all outstanding warrants and options to
     purchase shares of Common Stock were exercised in full at a weighted
     average exercise price of $2.74 per share of Common Stock.
 
     The following table summarizes, on a pro forma basis (as described above)
as of March 31, 1996, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by the existing stockholders and by the new investors purchasing
shares of Common Stock in the Offering, at an assumed initial public offering
price of $11.00 per share and before deducting estimated underwriting discounts
and commissions and offering expenses:
SHARES PURCHASED       TOTAL CONSIDERATION      AVERAGE
                                          --------------------    ---------------------      PRICE
                                            NUMBER     PERCENT      AMOUNT      PERCENT    PER SHARE
                                          ----------   -------    -----------   -------    ---------
Existing stockholders...............   9,761,989      79.0%   $32,647,414      53.3%     $3.34
    New investors.......................   2,600,000      21.0     28,600,000      46.7      11.00
                                          ----------   -------    -----------   -------
              Total.....................  12,361,989     100.0%   $61,247,414     100.0%
                                           =========    ======     ==========    ======
The above tables excludes (i) 59,722 shares issued on June 21, 1996 in
connection with the purchase of the rock website, Rocktropolis, (ii) 1,880,952
shares of Common Stock issuable upon exercise of outstanding stock options,
(iii) 2,571,403 shares of Common Stock reserved for future grants under the
Company's stock option and purchase plans and (iv) 135,555 shares of Common
Stock reserved for issuance pursuant to the exercise of outstanding warrants.
The weighted average exercise price of all outstanding options and warrants is
$2.74 per share. See "Management -- Stock Plans," "Description of Capital Stock"
and Note 5 of Notes to Consolidated Financial Statements.
 
                                       17
20
 
                                 CAPITALIZATION
 
     The following table sets forth (i) the capitalization of the Company as of
March 31, 1996, (ii) the pro forma capitalization of the Company as of such date
giving effect to (a) the sale of certain shares of Series E Preferred Stock and
shares of Series F Preferred Stock subsequent to March 31, 1996 and (b) the
automatic conversion of all outstanding shares of the Company's Preferred Stock
into Common Stock upon the consummation of the Offering but without giving
effect to the purchase of the rock website, Rocktropolis, and (iii) the pro
forma capitalization of the Company as adjusted to give effect to the sale of
the Common Stock offered hereby at an assumed initial public offering price of
$11.00 per share and after deducting estimated underwriting discounts and
commissions and offering expenses. This table should be read in conjunction with
the Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Prospectus. See "Description of Capital Stock."
MARCH 31, 1996
                                                       ------------------------------------------
                                                          ACTUAL       PRO FORMA     AS ADJUSTED
                                                       ------------   ------------   ------------
Stockholders' equity:
  Preferred stock, $0.001 par value; 20,000,000
     shares authorized, 9,154,555 shares issued and
     outstanding, actual; none issued and
     outstanding, pro forma and as adjusted..........  $      9,155   $         --   $         --
  Common stock, $0.001 par value; 100,000,000 shares
     authorized; 3,886,548 shares issued and
     outstanding, actual; 9,761,989 shares issued and
     outstanding, pro forma; and 12,361,989 shares
     issued and outstanding, as adjusted(1)..........         3,887          9,762         12,362
  Additional paid-in capital.........................    15,683,925     31,587,205     57,482,605
  Accumulated deficit................................   (13,280,629)   (13,280,629)   (13,280,629)
                                                       ------------   ------------   ------------
     Total stockholders' equity......................     2,416,338     18,316,338     44,214,338
                                                       ------------   ------------   ------------
          Total capitalization.......................  $  2,416,338   $ 18,316,338   $ 44,214,338
                                                        ===========    ===========    ===========
- ------------------------------
 
(1) Excludes (i) 59,722 shares issued on June 21, 1996 in connection with the
     purchase of the rock website, Rocktropolis, (ii) 1,880,952 shares of Common
     Stock issuable upon exercise of outstanding stock options, (iii) 2,571,403
     shares of Common Stock reserved for future grants under the Company's stock
     option and purchase plans and (iv) 135,555 shares of Common Stock reserved
     for issuance pursuant to the exercise of outstanding warrants. The weighted
     average exercise price of all outstanding options and warrants is $2.74 per
     share. See "Management -- Stock Plans," "Description of Capital Stock" and
     Note 5 of Notes to Consolidated Financial Statements.
 
                                       18
21
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The selected consolidated financial data set forth below as of and for the
years ended December 31, 1991, 1992, 1993, 1994 and 1995 and for the three
months ended March 31, 1996, have been derived from the Company's financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The consolidated financial statements of the Company for each of
the three years in the period ended December 31, 1995 and the three months ended
March 31, 1996 and the related balance sheets at December 31, 1994 and 1995 and
March 31, 1996, which have been audited by Arthur Andersen LLP, have been
included elsewhere in this Prospectus. The selected statement of operations data
for the three months ended March 31, 1995 have been derived from unaudited
financial statements of the Company that, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the financial condition and results of operations for
this interim period. The results of operations for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
any other interim period or for the entire year. The selected consolidated
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus.
THREE MONTHS ENDED
                                                       YEAR ENDED DECEMBER 31,                                MARCH 31,
                                  ------------------------------------------------------------------   ------------------------
                                     1991         1992          1993          1994          1995          1995         1996
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
STATEMENT OF OPERATIONS DATA:
  Revenues:
    Entertainment...............  $   --       $   --        $   --        $   --        $    96,505   $   --       $   216,800
    Information services........   8,924,784     8,248,631    10,360,257    11,391,780    10,976,711    3,204,151     2,514,382
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
                                   8,924,784     8,248,631    10,360,257    11,391,780    11,073,216    3,204,151     2,731,182
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
  Cost of revenues:
    Entertainment...............      --           --            --            --             85,176       --           213,003
    Information services........   4,050,474     4,729,420     5,747,293     6,558,541     6,489,472    1,863,647     1,591,641
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
                                   4,050,474     4,729,420     5,747,293     6,558,541     6,574,648    1,863,647     1,804,644
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
      Gross profit..............   4,874,310     3,519,211     4,612,964     4,833,239     4,498,568    1,340,504       926,538
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
  Operating expenses:
    Operating and
      development(1)............   1,821,417     1,553,216     1,350,057     1,777,654     2,267,852      536,721     1,247,573
    Sales and marketing.........   1,517,195     1,380,892     1,213,829     1,364,198     2,575,618      501,172       430,993
    General and
      administrative............   1,529,451     1,777,701     1,471,150     1,564,658     1,337,731      343,241       507,255
    Charge for purchased
      research and
      development(2)............      --           --            --            --            --            --         4,133,281
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
      Operating income (loss)...       6,247    (1,192,598)      577,928       126,729    (1,682,633)     (40,630)   (5,392,564)
  Interest income...............     101,959        65,658        43,761        73,359       106,370       27,683        24,904
  Interest expense..............     (74,893)     (105,658)      (82,890)      (48,398)      (18,237)      (3,544)      (16,552)
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
      Income (loss) before
        income taxes............      33,313    (1,232,598)      538,799       151,690    (1,594,500)     (16,491)   (5,384,212)
  Income taxes..................      --           --             33,913         9,280           300          663       --
                                  ----------   -----------   -----------   -----------   -----------   ----------   -----------
  Net income (loss).............  $   33,313   $(1,232,598)  $   504,886   $   142,410   $(1,594,800)  $  (17,154)  $(5,384,212)
                                   =========    ==========    ==========    ==========    ==========    =========    ==========
  Pro forma net loss per common
    share(3)....................                                                         $     (0.15)               $     (0.49)
                                                                                          ==========                 ==========
  Shares used in computing pro
    forma net loss per common
    share(3)....................                                                          10,939,989                 10,925,422
                                                                                          ==========                 ==========
19
22
DECEMBER 31,                                 MARCH 31, 1996
                                      --------------------------------------------------------------   -------------------------
                                         1991         1992         1993         1994         1995        ACTUAL     PRO FORMA(4)
                                      ----------   ----------   ----------   ----------   ----------   ----------   ------------
BALANCE SHEET DATA:
  Working capital (deficit).........  $  640,704   $ (263,801)  $  171,779   $1,812,216   $   20,200   $1,070,133   $16,970,133
  Total assets......................   4,245,506    3,592,953    3,909,098    4,776,923    3,658,660    5,806,745    21,706,745
  Long-term debt, excluding current
    portion.........................     225,000       75,000           --           --           --           --            --
  Stockholders' equity..............   1,262,842       37,244      542,130    2,243,704      648,984    2,416,338    18,316,338
- ------------------------------
 
(1) For the year ended December 31, 1995 and the three months ended March 31,
     1995 and 1996, the Company incurred costs of $1.3 million, $286,000 and
     $496,000 relating to research and development. These amounts are included
     in operating and development expenses. For the periods prior to 1995, the
     Company did not separately identify research and development costs.
 
(2) On February 13, 1996, New York N2K, which was founded in 1995 as a developer
     of online music entertainment content, was merged with and into Telebase, a
     Pennsylvania corporation formed in 1984 as a provider of online information
     services. In connection with the Merger, the Company incurred a one-time
     charge for purchased research and development. See Notes 1 and 2 of Notes
     to Consolidated Financial Statements.
 
(3) Reflects the conversion of all outstanding shares of the Company's Preferred
     Stock into Common Stock upon the consummation of the Offering. See Note 1
     of Notes to Consolidated Financial Statements. If the Merger had occurred
     on January 1, 1995, the pro forma results would have been as follows:
THREE MONTHS
                                                           YEAR ENDED             ENDED
                                                        DECEMBER 31, 1995     MARCH 31, 1996
                                                        -----------------     --------------
Unaudited pro forma revenues..................     $11,216,842         $  2,799,809
                                                         =============          ===========
        Unaudited pro forma net loss..................     $(2,839,579)        $ (1,634,819)
                                                         =============          ===========
        Unaudited pro forma net loss per Common
          Share.......................................     $     (0.26)        $      (0.15)
                                                         =============          ===========
The above pro forma information for both periods excludes the one-time
    charge of $4.1 million associated with the write-off of purchased research
    and development.
 
(4) Reflects (i) the sale of certain shares of Series E Preferred Stock and
     shares of Series F Preferred Stock subsequent to March 31, 1996, and (ii)
     the automatic conversion of all outstanding shares of the Company's
     Preferred Stock into Common Stock upon consummation of the Offering.
 
                                       20
23
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     N2K is a music entertainment company focused on providing original content,
interactive programming and recorded music using the Internet as a new global
marketing, promotion and distribution medium. By combining its music industry
and technical expertise, N2K has created an interactive, entertaining and
content-rich online environment, which includes its award-winning merchandising
website, Music Boulevard, music genre websites, Jazz Central Station and
Rocktropolis, and individual artist websites for such artists as David Bowie and
The Rolling Stones. In February 1996, N2K Inc., which was founded in 1995 as a
developer of online music entertainment content was merged with Telebase, which
was founded in 1984 as a provider of online information services. In 1995,
recognizing increasing opportunities in the consumer entertainment market,
Telebase expanded its online strategy to include music entertainment and began
expending significant resources to enter this market.
 
     The Company launched its first Internet website, Music Boulevard, in August
1995, and introduced its first music genre website, Jazz Central Station, in
January 1996. The Company's revenues from its online music entertainment
business have grown from approximately $85,000 for the three months ended
December 31, 1995 to approximately $217,000 for the three months ended March 31,
1996. To date, the primary source of entertainment revenues has been the sale of
CDs and cassettes produced by others. Margins on such sales are impacted by
payments to a third party for fulfillment of customer orders, telecommunications
and credit card processing charges. Margins have also been impacted on a
historical basis due to customer subscription programs, which have now been
discontinued. In the future, the Company expects to also generate music
entertainment revenues from the sale of N2K Encoded Music CDs, the sale of
advertising on its websites and the sale of music-related merchandise, which the
Company believes will contribute to higher margins. The Company believes that
its future financial performance will be determined in large part by its success
in selling recorded music under its planned label, and by selling advertising
space on its websites.
 
     Historically, substantially all of the Company's revenues have been
generated through the sale of online information services. The Company's
principal information service is EasyNet, a premium-priced general reference
retrieval service licensed to online content distributors, primarily CompuServe
and NIFTY. The online information services business has been undergoing a
transition as more reference content has become directly available to consumers
on the Internet at minimal or no cost, thus competing with established online
services such as CompuServe. In response to this transition, the Company
unbundled its EasyNet services on CompuServe beginning in June 1995 and lowered
its prices, thereby significantly reducing the Company's revenues. The Company
has re-focused its information services on premium-priced databases serving
specific business needs, such as business credit and intellectual property, for
which the Company believes the market is less price sensitive than for general
reference databases. In addition, the Company has recently introduced desktop
software providing customized database services focused on the specialized needs
of the SOHO market. The Company markets these services through Knight-Ridder
(Custom DIALOG and DIALOG Quickstarts) and plans to market these services
through other large publishers in the future. See "Business -- N2K Information
Services." The Company generates information services revenues through
transactional charges to the distributors for their customers' use of the
service and royalty fees for use of the Company's desktop software.
 
     The Company believes that its experience in developing and providing
information services is critical to its ability to develop its online music
entertainment business. To date, however, the Company has only a limited
operating history in its entertainment business upon which an evaluation of N2K
and its prospects can be based. Accordingly, N2K believes that the results of
its operations for the past five years, during which time the Company had almost
no online music entertainment revenues, are not meaningful indications of future
performance. See "Risk Factors -- History of Losses; Uncertainty of Future
Results" and "Risk Factors -- Management of Growth; Changing Business Focus;
Acquisitions."
 
                                       21
24
 
     On February 13, 1996, New York N2K, which was founded in 1995 as a
developer of online music entertainment content, was merged with and into
Telebase, a provider of online information services. Pursuant to the Merger, the
stockholders of New York N2K received shares of Common Stock and shares of
Series E Preferred Stock. The Merger was accounted for as a purchase transaction
with a total purchase price, including transaction costs, of approximately $4.4
million. In connection with the Merger, $4.1 million was charged to expense as
of the date of the transaction as a one-time charge to record the write-off of
purchased research and development. The Company also recorded goodwill of
$280,000 that is being amortized over five years on a straight-line basis. The
results of the acquired business and the shares issued in connection with the
transaction have been included in the Company's financial statements since
February 13, 1996.
 
     On June 21, 1996, the Company acquired the rock website, Rocktropolis, from
Rocktropolis Enterprises, LLC, for $633,000 in cash and 59,722 shares of Common
Stock. The acquisition will be accounted for as a purchase. The Company will
charge to expense as of the date of the acquisition a significant portion of the
purchase price as a one-time charge to record the write-off of purchased
research and development. Such charge to expense will be recorded in the quarter
ending June 30, 1996.
 
QUARTERLY RESULTS
 
     The following table sets forth certain financial information for each of
the Company's last five quarters. This unaudited quarterly information has been
prepared on the same basis as the audited financial statements presented
elsewhere in this Prospectus and, in the opinion of the Company's management,
reflects all adjustments (consisting only of normal, recurring adjustments)
necessary for a fair presentation of the information for the periods covered.
The table should be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period.
THREE MONTHS ENDED
                                     --------------------------------------------------------------------
                                     MARCH 31,     JUNE 30,    SEPTEMBER 30,   DECEMBER 31,    MARCH 31,
                                        1995         1995          1995            1995          1996
                                     ----------   ----------   -------------   ------------   -----------
Revenues:
  Entertainment....................  $       --   $       --    $    11,602     $   84,903    $   216,800
  Information services.............   3,204,151    2,795,913      2,587,936      2,388,711      2,514,382
                                     ----------   ----------   -------------   ------------   -----------
                                      3,204,151    2,795,913      2,599,538      2,473,614      2,731,182
                                     ----------   ----------   -------------   ------------   -----------
Cost of revenues:
  Entertainment....................          --           --         11,187         73,989        213,003
  Information services.............   1,863,647    1,638,363      1,542,791      1,444,671      1,591,641
                                     ----------   ----------   -------------   ------------   -----------
                                      1,863,647    1,638,363      1,553,978      1,518,660      1,804,644
                                     ----------   ----------   -------------   ------------   -----------
     Gross profit..................   1,340,504    1,157,550      1,045,560        954,954        926,538
                                     ----------   ----------   -------------   ------------   -----------
Operating expenses:
  Operating and development........     536,721      594,196        580,269        556,666      1,247,573
  Sales and marketing..............     501,172      577,642        658,054        838,750        430,993
  General and administrative.......     343,241      344,364        342,397        307,729        507,255
  Charge for purchased research and
     development...................      --           --            --             --           4,133,281
                                     ----------   ----------   -------------   ------------   -----------
     Operating income (loss).......     (40,630)    (358,652)      (535,160)      (748,191)    (5,392,564)
Interest income/expense (net)......      24,139       26,768         23,277         13,949          8,352
                                     ----------   ----------   -------------   ------------   -----------
     Income (loss) before income
       taxes.......................     (16,491)    (331,884)      (511,883)      (734,242)    (5,384,212)
Income taxes.......................         663          225            504         (1,092)            --
                                     ----------   ----------   -------------   ------------   -----------
Net income (loss)..................  $  (17,154)  $ (332,109)   $  (512,387)    $ (733,150)   $(5,384,212)
                                      =========    =========     ==========     ==========     ==========
22
25
 
     In August 1995, the Company launched its first Internet website, Music
Boulevard, and introduced Jazz Central Station, its first music genre website,
in January 1996. The Company's sales relating to its entertainment services,
which have been primarily from the sale of CDs and cassettes produced by others,
have grown from $85,000 for the three months ended December 31, 1995 to $217,000
for the three months ended March 31, 1996. Revenues for information services
declined each quarter in 1995, reflecting a less favorable environment for
commercial information services and the Company's decision to unbundle its
premium-priced services on CompuServe beginning in June 1995. CompuServe
accounted for approximately 76.3% of the Company's revenues in 1995. See "Risk
Factors -- Dependence on Key Customers."
 
     The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including demand
for the Company's services, the timing of the introduction or enhancement of
websites and services by the Company and its competitors, market acceptance of
new services, the mix of services sold, seasonality of the information retrieval
services markets and recorded music industry, seasonality in recorded music
advertising sales, the timing of new releases by the Company's planned record
label, technical difficulties and system downtime and general economic
conditions. In addition, the Company only recently entered the music
entertainment business, the Company anticipates that revenues from its music
entertainment business will track traditional consumer buying habits. Therefore,
music revenues are expected to decline during the summer months of the second
and third quarters and to increase during the late fourth-quarter peak holiday
season. As a result, the Company believes that period-to-period comparisons of
its results of operations are not and will not necessarily be meaningful and
should not be relied upon as an indication of future performance. See "Risk
Factors -- Potential Fluctuations in Quarterly Results; Seasonality."
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, certain items
derived from the Company's statements of operations as a percentage of revenues.
THREE MONTHS
                                                                                        ENDED
                                                        YEAR ENDED DECEMBER 31,       MARCH 31,
                                                        -----------------------    ---------------
                                                        1993     1994     1995     1995      1996
                                                        -----    -----    -----    -----    ------
Revenues:
  Entertainment.......................................     --%      --%     0.9%      --%      7.9%
  Information services................................  100.0    100.0     99.1    100.0      92.1
                                                        -----    -----    -----    -----    ------
                                                        100.0    100.0    100.0    100.0     100.0
                                                        -----    -----    -----    -----    ------
Cost of revenues:
  Entertainment.......................................     --       --      0.8       --       7.8
  Information services................................   55.5     57.6     58.6     58.2      58.3
                                                        -----    -----    -----    -----    ------
                                                         55.5     57.6     59.4     58.2      66.1
                                                        -----    -----    -----    -----    ------
     Gross profit.....................................   44.5     42.4     40.6     41.8      33.9
                                                        -----    -----    -----    -----    ------
Operating expenses:
  Operating and development...........................   13.0     15.6     20.5     16.8      45.7
  Sales and marketing.................................   11.7     12.0     23.2     15.6      15.7
  General and administrative..........................   14.2     13.7     12.1     10.7      18.6
  Charge for purchased research and development.......     --       --       --       --     151.3
                                                        -----    -----    -----    -----    ------
     Operating income (loss)..........................    5.6      1.1    (15.2)    (1.3)   (197.4)
Interest income.......................................    0.4      0.6      1.0      0.9       0.9
Interest expense......................................   (0.8)    (0.4)    (0.2)    (0.1)     (0.6)
                                                        -----    -----    -----    -----    ------
     Income (loss) before income taxes................    5.2      1.3    (14.4)    (0.5)   (197.1)
Income taxes..........................................    0.3       --       --       --        --
                                                        -----    -----    -----    -----    ------
Net income (loss).....................................    4.9      1.3    (14.4)    (0.5)   (197.1)
                                                        =====    =====    =====    =====    ======
23
26
 
  Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995
 
     Revenues.  Entertainment revenues for the three months ended March 31, 1996
totaled $217,000. The Company had no entertainment revenues for the three months
ended March 31, 1995. Information services revenues declined 21.5% from $3.2
million for the three months ended March 31, 1995 to $2.5 million for the three
months ended March 31, 1996 due primarily to the Company's unbundling of its
premium-priced services and lowering of prices on CompuServe in June 1995 and
lower volume. CompuServe and NIFTY accounted for approximately 68.9% and 11.0%,
respectively, of revenues for the three months ended March 31, 1996. See "Risk
Factors -- Dependence on Key Customers."
 
     Cost of Revenues.  Cost of revenues for entertainment totaled $213,000
(98.2% of entertainment revenues) for the three months ended March 31, 1996.
Cost of revenues for entertainment consists of payments to a third-party
fulfillment operation for the shipment to the Company's customers of music CDs
and cassettes produced by others, telecommunications and credit card processing
charges and costs associated with customer subscription programs, which programs
have been discontinued.
 
     Cost of revenues for information services declined 14.6% from $1.9 million
for the three months ended March 31, 1995 (58.2% of information services
revenues) to $1.6 million for the three months ended March 31, 1996 (63.3% of
information services revenues). Cost of revenues for information services
consists primarily of payments to information providers for content used in the
Company's information services and payments to telecommunications carriers. Cost
of revenues for information services as a percentage of information services
revenues increased reflecting decreased prices related to the Company's decision
to unbundle premium-priced services offered on CompuServe beginning in June
1995.
 
     Operating and Development Expenses.  Operating and development expenses
increased 132.4% from $537,000 for the three months ended March 31, 1995 (16.8%
of total revenues) to $1.2 million for the three months ended March 31, 1996
(45.7% of total revenues), due to increased staffing resulting from the Merger
and a reorganization of resources within the Company to increase development of
music websites. Operating and development expenses consist primarily of software
engineering, multimedia production, graphic design and computer operations used
in the development, operation and maintenance of the Company's services.
 
     Sales and Marketing Expenses.  Sales and marketing expenses declined 14.0%
from $501,000 for the three months ended March 31, 1995 (15.6% of total
revenues) to $431,000 for the three months ended March 31, 1996 (15.7% of total
revenues) due to the reorganization of resources within the Company to increase
development of music websites and to delays in filling vacant positions in sales
and marketing. The Company expects that levels of sales and marketing
expenditures will significantly increase in future periods.
 
     General and Administrative Expenses.  General and administrative expenses
increased 47.8% from $343,000 for the three months ended March 31, 1995 (10.7%
of total revenues) to $507,255 for the three months ended March 31, 1996 (18.6%
of total revenues) due to the addition of personnel as a result of the Merger.
 
     The Company incurred a one-time charge in 1996 of $4.1 million to record
the write-off of purchased research and development resulting from the Merger.
The amount represented the estimated fair values related to incomplete research
and development projects that were acquired as determined by independent
appraisals. The technology acquired will require substantial additional
development by the Company. On June 21, 1996 the Company acquired the rock
website, Rocktropolis. The acquisition will be accounted for as a purchase. The
Company will charge to expense as of the date of the acquisition a significant
portion of the purchase price as a one-time charge to record the write-off of
purchased research and development. Such charge to expense will be recorded in
the quarter ending June 30, 1996.
 
     Interest income and expense consist of interest income on short-term liquid
investments of the Company's excess cash and interest expense incurred by the
financing of equipment through capital leases and the use of the Company's
revolving credit line. There was no significant change in interest income from
1995 to 1996. Interest expense increased due to the addition of capital leases
from the Merger and the use of the Company's revolving credit line in 1996 to
fund working capital.
 
                                       24
27
 
  Fiscal 1995 Compared with Fiscal 1994
 
     Revenues.  Entertainment revenues for 1995 totaled $97,000, reflecting the
Company's launch of its entertainment services in August 1995. The Company had
no entertainment revenues prior to 1995. Information services revenues declined
3.6% from $11.4 million in 1994 to $11.0 million in 1995, primarily due to a
decline in revenues from one distributor that no longer accounts for a
significant portion of the Company's information services revenues. In 1995, the
Company reduced prices as it unbundled its premium-priced services on CompuServe
in June 1995. CompuServe and NIFTY accounted for 76.3% and 10.5%, respectively,
of information services revenues in 1995.
 
     Cost of Revenues.  Cost of revenues for entertainment totaled $85,000 in
1995 (88.3% of entertainment revenues, reflecting primarily payments to a
third-party fulfillment operation for the shipment to the Company's customers of
music CDs and cassettes produced by others and telecommunications and credit
card processing charges. Cost of revenues for information services declined 1.1%
from $6.6 million in 1994 (57.6% of information services revenues) to $6.5
million in 1995 (59.1% of information services revenues). The increase in cost
of information services revenues as a percentage of information services
revenues reflects the Company's strategic decision to reduce margins for
competitive reasons.
 
     Operating and Development Expenses.  Operating and development expenses
increased 27.6% from $1.8 million in 1994 (15.6% of total revenues) to $2.3
million in 1995 (20.5% of total revenues). The increase reflects the expansion
of the Company's engineering staff and the development and launch of Music
Boulevard.
 
     Sales and Marketing Expenses.  Sales and marketing expenses increased 88.9%
from $1.4 million in 1994 (12.0% of total revenues) to $2.6 million in 1995
(23.2% of total revenues). The Company sells its information services products
through distributors that bear the majority of the marketing expenses to reach
customers. In its entertainment business, the Company incurs the expenses of
marketing directly to its customers, and the increase in sales and marketing
expenses reflects primarily costs associated with the launch of Music Boulevard.
 
     General and Administrative Expenses.  General and administrative expenses
declined 14.5% from $1.6 million in 1994 (13.7% of revenues) to $1.3 million in
1995 (12.1% of revenues). The decline reflects the Company's efforts to reduce
general and administrative expenses in order to provide additional funds for its
research and development activities.
 
  Fiscal 1994 Compared with Fiscal 1993
 
     Revenues.  Information services revenues increased 10.0% from $10.4 million
in 1993 to $11.4 million in 1994, primarily due to growth of the Company's two
largest distributors, CompuServe and NIFTY, which accounted for 74.5% and 9.6%,
respectively, of revenues in 1994.
 
     Cost of Revenues.  Cost of revenues for information services increased
14.1% from $5.7 million in 1993 (55.5% of information services revenues) to $6.6
million in 1994 (57.6% of information services revenues). The increase in cost
of information services revenues was due primarily to price increases from
information providers that the Company did not pass on to its customers.
 
     Operating and Development Expenses.  Operating and development expenses
increased 31.7% from $1.4 million in 1993 (13.0% of total revenues) to $1.8
million in 1994 (15.6% of total revenues). The increase reflects the expansion
of the Company's engineering staff.
 
     Sales and Marketing Expenses.  Sales and marketing expenses increased 12.4%
from $1.2 million in 1993 (11.7% of total revenues) to $1.4 million in 1994
(12.0% of total revenues), due to increased spending to market services on
CompuServe through print advertising.
 
     General and Administrative Expenses.  General and administrative expenses
increased 6.4% from $1.5 million in 1993 (14.2% of revenues) to $1.6 million in
1994 (13.7% of revenues).
 
                                       25
28
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company has financed its operations and capital expenditures primarily
from equity financings, cash generated from operations, lease financings and a
revolving bank credit line described herein. At March 31, 1996, the Company had
a cash balance of $1.5 million. Subsequent to March 31, 1996, the Company had
raised net proceeds of $15.9 million through the private placement of Preferred
Stock to fund the future growth of its business. Cash on hand plus the proceeds
of the Offering are expected to provide the funds needed to finance the
Company's planned operations and capital expenditures for at least the next two
years. The Company expects negative cash flow from operations to continue for
the foreseeable future, as it continues to develop and market its online
entertainment operations. See "Risk Factors -- History of Losses; Uncertainty of
Future Results," "-- Possible Need for Additional Funds" and "Use of Proceeds."
 
     The Company has a commitment for a $1.0 million revolving line of credit
with CoreStates Bank, N.A. (the "CoreStates Facility"), which will expire on
June 30, 1996. The CoreStates Facility bears interest at the prime rate for
borrowings which do not exceed $500,000 and at the prime rate plus 1% for
borrowings which exceed $500,000 and is secured by a security interest in
substantially all of the Company's assets. Maximum borrowings under the
CoreStates Facility are limited to certain percentages of eligible accounts
receivable. The CoreStates Facility is subject to an unused commitment fee in
the amount of 0.5% of the unused portion of the facility on a quarterly basis.
The Company is negotiating an extension of the CoreStates Facility.
 
     From time to time, in the ordinary course of business, the Company
evaluates possible acquisitions of or investments in businesses, products and
technologies that are complementary to those of the Company. A portion of the
Company's cash resources may therefore be used to fund acquisitions or
investments. The Company currently has no arrangements, agreements or
understandings, and is not engaged in active negotiations, with respect to any
such acquisition or investment. See "Risk Factors -- Management of Growth;
Changing Business Focus; Acquisitions."
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. This statement
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company is required to adopt
SFAS 123 effective January 1, 1996. The Company has elected to adopt the
disclosure requirement of this pronouncement. The adoption of this pronouncement
is expected to have no impact on the Company's financial position or results of
operations.
 
                                       26
29
 
                                    BUSINESS
 
THE COMPANY
 
     N2K is a music entertainment company focused on providing original content,
interactive programming and recorded music using the Internet as a new global
marketing, promotion and distribution medium. By combining its music industry
and technical expertise, N2K has created an interactive, entertaining and
content-rich online environment, which includes its award-winning merchandising
website, Music Boulevard (WWW.MUSICBLVD.COM), music genre websites, Jazz Central
Station (WWW.JAZZCENTRALSTATION.COM) and Rocktropolis (WWW.ROCKTROPOLIS.COM),
and individual artist websites for such artists as David Bowie
(WWW.DAVIDBOWIE.COM) and the Rolling Stones (WWW.STONESWORLD.COM). See
"-- Entertainment Products and Services -- Websites." These websites provide a
comprehensive entertainment and information resource enabling users to search
and sample music and artist information interactively through sound, video and
graphics. Each of the music genre and individual artist websites features a
hotlink directly with Music Boulevard to facilitate purchases of CDs, cassettes
and related merchandise. The Company plans to introduce its own recorded music
label, N2K Encoded Music, with its first release scheduled for October 1996. N2K
expects that all of its N2K Encoded Music CDs will be enhanced with multimedia
capabilities ("Enhanced CDs" or "E-CDs") and will be marketed and sold through
the Company's Internet websites as well as through traditional retail and other
distribution channels. The Company believes that its strategy of combining
Internet content, interactive sales and music produced on its own label will
enhance its ability to create compelling music brand names, address the broadest
possible music audience and build a customer base founded on targeted music
interests. The Company believes that its interactive sales channel will also
provide a new targeted advertising, promotion and distribution medium for the
music industry that will reach a global user base and that this medium will
shift the way music is marketed to consumers. See "-- The N2K Approach."
 
     Music Boulevard was launched in August 1995, and Jazz Central Station was
introduced in January 1996. Jazz Central Station is the official online website
for George Wein's Festival Productions, producer of the JVC Jazz Festivals, and
the Monterey Jazz Festival for 1996. On June 21, 1996, the Company acquired the
rock website, Rocktropolis, which was launched in June 1995 and which will be
integrated with the Company's existing websites. As part of its strategy to
provide locally tailored content, the Company's first foreign language site will
be launched in Japan in June 1996. Additional music genre sites are scheduled
for release in 1996 and 1997. See "-- Entertainment Products and
Services -- Planned Internet Sites." The Company's website strategy is to build
worldwide online communities around specific music genres where people may
socialize with each other and their favorite artists in a personal environment.
The Company believes that organizing its websites by genres, such as rock, jazz
and classical music, parallels traditional radio play formats and consumer
buying patterns and opens the interactive buying experience to the broadest
possible audience. In addition, the Company believes its genre websites provide
an attractive forum for the consumer to obtain information on specific artists,
and receive updates about related concert tours, music events and other
promotions. The Company believes that traffic flowing from the genre websites
may lead to increased traffic to Music Boulevard and a higher volume of
purchases. The Company's revenues from music entertainment have grown from
approximately $85,000 in the fourth quarter of 1995, to approximately $217,000
in the first quarter of 1996. Substantially all of these revenues were from the
sale of CDs and cassettes produced by other labels.
 
     The Company strengthened its music entertainment focus through the Merger
of New York N2K and Telebase completed in February 1996. However, to date,
substantially all of the Company's revenues have been derived from its online
information services. The Company believes that its ability to aggregate content
from a wide variety of sources, its database management skills and the
infrastructure provided by Telebase will enhance N2K's ability to scale the
infrastructure to facilitate the Company's growth and to create proprietary
databases for targeted marketing to music consumers. See "-- N2K Technology." In
addition, the Company continues to serve its information services customers and
is developing web-based software and information services for the business and
SOHO markets.
 
                                       27
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INDUSTRY OVERVIEW
 
  The Recorded Music Industry
 
     The recorded music industry represented approximately a $40 billion global
market in 1995, of which domestic sales accounted for approximately $12 billion.
Industry sources indicate that online sales of recorded music are expected to
exceed $30 million in 1996. The Company believes that online sales of recorded
music will complement the traditional retail channel and will expand overall
music sales due to the online medium's ability to capitalize on the ongoing
shift in demographics of music buyers, to effectively tap a growing
international consumer market and to offer the consumer easier access to a broad
range of titles.
 
     Historically, the development of technology has been one of the major
drivers of growth in the music industry. The introduction of the compact disc in
1983 has been a key factor in the industry's growth during the last decade as
consumers have replaced existing music collections with the CD format. Although
the rate of growth in unit sales of CDs in the U.S. market has lessened in the
1990s, the recorded music industry has continued to experience significant
growth due to expanding distribution, strong growth in the international markets
and shifting demographics. Stores other than record stores, tape and record
clubs and mail order facilities have become an important part of how recorded
music is distributed. For example, tape and record clubs and mail order
collectively comprised approximately 19% of domestic sales in 1994 versus
approximately 11% in 1990. These distribution channels have been particularly
successful in increasing music sales to older consumers who have become a more
important factor in overall music sales in recent years.
 
     The Company believes that the demographic profile of consumers of recorded
music has aged along with the population. According to the Recording Industry
Association of America (the "RIAA"), U.S. purchases of recorded music by the
over-30 age group have increased from approximately 37% of U.S. sales in 1985 to
approximately 47% of sales in 1994 representing total annual sales of
approximately $6 billion. The Company believes that the Internet represents an
attractive retail and promotion medium for customers in this age group because
they are less "hits driven" than younger age groups, typically can afford to buy
more titles at one time (reducing the per unit cost of shipping an electronic
order), often own personal computers and generally have credit cards which are
necessary to engage in electronic commerce.
 
     In addition, international markets for recorded music are growing faster
than the U.S. market. This growth is expected to continue as the music companies
expand their focus beyond English language popular music to local artists and as
television music channels proliferate and promotional tools expand
internationally. Due to the global network it provides, the Company believes the
Internet is well-positioned to tap into international consumer markets where
music sales are growing faster than in the U.S.
 
     In recent years, the music retailing industry has undergone major changes
as the industry has aggressively expanded the number of retail stores, including
megastores, on a national and international level, and as the retail music
environment has become more competitive with the expansion of new music
distribution channels. As a result, the Company believes that it is necessary to
reduce costs at the same time as the number of new releases which need to be
promoted and distributed has increased significantly. According to Soundscan,
Inc., a retail audio sales data collection company ("Soundscan"), the number of
new releases in 1995 was approximately 29,000 titles. Approximately 72% of unit
sales in 1995 came from approximately 2% of all titles available. Consequently,
many music retailers have focused on hit releases, which account for a high
percentage of a store's total sales but represent a small subset of generally
available titles. Retailers limit their overall inventory to match this hits
driven business model, making it increasingly difficult for consumers to get a
broad range of titles from the retail channel. For example, music stores stock
an average of approximately 10,000 SKUs and megastores stock an average of
approximately 35,000 SKUs of a total of approximately 145,000 SKUs generally
available in the U.S. In addition, the Company believes that the focus on hit
releases makes it more difficult for the industry to promote other titles cost
effectively. Today, new music releases are promoted through radio, print
advertising, music video and concert touring. These marketing efforts must cover
a great number of releases and compete for the attention of consumers. As a
result, exposing consumers to new artists and to a broad range of releases
creates a challenge for the record label companies.
 
                                       28
31
 
     The Company believes that the Internet is emerging as an important
distribution channel for music retailing because of its ability to
cost-effectively promote, market and deliver an extended product line to a music
buying and listening audience that is highly segmented. This market segmentation
is reflected by the number and variety of radio play formats. In addition, there
are currently over 25 Billboard recorded music and airplay charts. The following
is a selection of the new music category charts added by Billboard magazine
since 1985:
 
                                   BILLBOARD
  ----------------------------------------------------------------------------
       CERTAIN NEW MAGAZINE CHART CATEGORIES ADDED SINCE JANUARY 1, 1985
 
                               Album Rock (1985)
                             Hot Dance Music (1985)
                              Latin Albums (1985)
                                Latin Pop (1985)
                         Latin Regional Mexican (1985)
                          Latin Tropical/Salsa (1985)
                           Classical Crossover (1986)
                              Latin Singles (1986)
                      Top Jazz Contemporary Albums (1987)
                           Modern Rock Tracks (1988)
                         Top New Age Jazz Albums (1988)
                             Hot Rap Singles (1989)
                         Hot World Music Albums (1990)
                            Top Reggae Albums (1994)
 
  The Internet
 
     The power, reach and use of the Internet and online services have grown
rapidly since the commercialization of the Internet in the early 1990s. Much of
the recent growth in Internet use has been driven by the emerging Web, a global
network of Internet servers. Growth in the number of Internet users has been
fueled by a number of factors, including the existing and increasing base of
personal computers ("PCs") in the workplace and at home, improvements in the
performance and speed and reduction in cost of PCs and modems, improvements in
network infrastructure, enhanced ease of access to the Web provided by Internet
service providers, consumer-oriented online services and long distance telephone
companies, emergence of standards for Internet navigation and information
access, declining costs of Internet service due to increased competition among
access providers and increased awareness of the Internet among businesses and
consumers. Growth in Internet consumer usage has also been fueled by the
emergence of the Web, which makes use of graphical user interface technology and
simplifies the retrieval and transmission of information.
 
     International Data Corporation has estimated that the Internet had
approximately 38 million users in 1995, and that this number will grow to
approximately 200 million users by 1999. Industry research, however, indicates
that consumer entertainment-driven use of the Internet is growing, and will
continue to grow at an even more dramatic rate. Further, the growth in access
providers internationally will drive additional traffic over the Internet.
 
     The Company believes that the emergence of the Internet as a mainstream
consumer medium is creating opportunities for entertainment companies to provide
programming for large numbers of consumers. Through the Web, entertainment
companies can deliver timely, personalized content in a manner not possible
through other media. Entertainment programming over the Internet can be
continuously updated, distributed to a vast number of users on a realtime basis,
and accessed by users at any time. The Internet offers an exciting medium for
music and music-related content because of the capacity for the combination of
graphic, audio and video elements. The interactive nature of the Web further
allows the consumer to access music and entertainment information tailored to
the individual user's preferences and system requirements and facilitates the
purchase of recorded music. The Company believes that growth opportunities in
music-related products and services will be driven by the ability to market to
defined user groups and distribute products directly to
 
                                       29
32
 
these consumers. The Company believes that the Web will enable targeted
distribution, advertising and promotion, which can change the way products and
services are marketed to consumers. In addition, the ability to gather and
process data resulting from customer purchases and usage will facilitate
targeted promotional efforts in the highly segmented recorded music market.
 
THE N2K APPROACH
 
     The Company's objective is to build a dominant global music entertainment
company on the Internet. N2K's strategy is to offer engaging content,
interactive programming and recorded music to the consumer, and to provide a new
way for advertisers and merchants to reach targeted audiences, creating a new
channel through which music can be marketed, promoted and sold. Key elements of
the Company's strategy include:
 
     Build the N2K Brand Family.  The Company believes that Music Boulevard,
Jazz Central Station, Rocktropolis and its other planned websites will become
identified as brand names under the N2K umbrella, which will symbolize music
entertainment in the online digital age. The Company plans to build and expand
the N2K brand family by promoting its products and services through online
advertising in, and hotlinks with, record company websites, music artist
websites and online search directories such as Infoseek, Lycos, Netscape and
Yahoo! In addition, the Company seeks to create brand name recognition through
advertising and cross promotions in traditional channels such as retail music
stores, magazines and radio, endorsements by high profile music and online
industry participants, and promotion of the N2K brand family with organizations
and events that target the demographic profile of the N2K consumer. The Company
further believes that by continually expanding and developing the breadth, depth
and technological aspects of its websites and recorded music products, it will
be able to enhance its brand name franchise, sustain user growth, attract
advertisers and build its N2K Encoded Music label.
 
     Create Entertaining Buying Experience.  The Company creates content-rich
music genre sites, such as rock, jazz, classical, blues, country and urban,
through the combination of audio, graphics, text and video. The Company's genre
and artist websites allow users to target music and information based on
personal interests. The Company believes that this approach provides a
stimulating and entertaining online environment which establishes a community
atmosphere and promotes product sales principally through Music Boulevard. By
developing entertaining and informative content, and by providing a forum for
communication among online consumers, the Company's websites are designed to
motivate users to explore these music information resources, and to encourage
consumers to frequent a favorite website. A key characteristic of the Company's
websites is their dynamic and changing nature, which are designed to generate
immediacy and interest so that users want to return on a regular basis. The
Company believes that increased traffic on its websites will help to attract
additional advertising revenues.  See "-- Entertainment Products and
Services -- Websites."
 
     Create Own Record Label.  In addition to selling commercially available CDs
and cassettes and related music merchandise online, the Company considers the
launch of N2K Encoded Music to be a key part of its strategy to become a
dominant online music provider. The Company expects that all N2K Encoded Music
CDs will be enhanced with multimedia capabilities. The first releases under the
N2K Encoded Music label, scheduled for October 1996, are planned to be a
compilation of master recordings, based on a global poll of online users'
choices, licensed from other music labels and enhanced with video and graphics,
and a retrospective of Gerry Mulligan's recordings including two new recording
tracks. These and future recordings will be promoted through online promotional
and marketing events initiated by N2K with radio stations, concert promoters and
magazine publishers. In addition, the Company believes that it can leverage its
marketing and music industry expertise to sign artists to the N2K Encoded Music
label and promote and sell N2K Encoded Music Enhanced CDs through its online
interactive sales channel as well as through traditional retail and other
distribution channels. Beginning in the first calendar quarter of 1997, the
Company plans to release its first completely original artist recordings under
the N2K Encoded Music label. See "-- Entertainment Products and
Services -- Planned Record Label."
 
     Capitalize on Artist and Industry Relationships.  The Company believes that
the Internet offers a worldwide, direct one-on-one link between recording
artists and their music fans. Using the Internet, an artist can be showcased in
a unique multimedia environment, combining elements from radio, magazine,
newspaper,
 
                                       30
33
 
video channels and in-store appearances. The Company's relationships with
recording artists and other key music industry personnel have allowed the
Company to build rich content on its genre-specific websites such as in-depth
areas on particular artists and hotlinks with specific artist websites. Music
Boulevard currently offers direct links with the David Bowie and Stones World
websites, while the Herbie Hancock, Chick Corea and Gerry Mulligan websites are
featured areas within Jazz Central Station. In addition, the Company has
established an advisory board for Jazz Central Station, through which it
maintains relationships with recording artists, music industry executives,
promoters, writers and educators to remain on the cusp of new industry trends
and developments and form new strategic partnerships through which to further
enhance and develop its websites. See "-- Entertainment Products and
Services -- Websites."
 
     Expand Global Reach.  The Company believes that music is a global product.
According to the International Federation of the Phonographic Industry,
worldwide music sales have increased by more than 300% over the last ten years.
The Company also believes that the Internet has few barriers to reaching a
worldwide audience and enables content providers to provide an alternative
information and entertainment medium for consumers, especially in countries
where the traditional information channels are highly regulated or controlled.
Use of the Internet is also increasing at a rapid pace, with approximately 200
million users estimated by 1999. Since the inception of its music entertainment
business, 35% of the Company's music product revenues have been to consumers in
over 60 countries outside the U.S. The Company also expects to enhance its
international presence with foreign language websites, the first of which will
be launched in Japan in June 1996.
 
     Leverage Technology.  The Company believes that it has sophisticated
systems and tools for delivering high-quality multimedia content and interactive
customer support. In addition, the Company plans to use its technical expertise
in its online information business to create proprietary music-oriented database
products. To maintain its systems, the Company intends to implement new industry
standards as they emerge and to support additional hardware and software
platforms as they are introduced and accepted. The Company further believes that
it has built its operations and infrastructure with the scalability necessary to
allow for and manage significant growth.
 
MUSIC ENTERTAINMENT ENVIRONMENT
 
     The Company believes that its online services and products provide the
following benefits to online music consumers as well as to industry participants
such as advertisers, record companies and recording artists:
 
  Benefits to Consumers
 
     Breadth and Depth of Content and Products.  The Company believes that its
users value the breadth and depth of its entertainment content, as well as its
music and music-related product offerings. By drawing the user into areas of
personal interest, the Company aims to drive sales deep into the catalog and
generate incremental sales by exposing the consumer to music for which his or
her knowledge or access may be limited in a traditional music store environment.
The Company believes that by providing information in an entertaining
programming format, consumers will be more likely to purchase music products.
The Company intends to enhance and expand its current content as well as to
develop and expand coverage to new areas. The Company will continue to seek
relationships with entities such as educational institutions, record labels,
instrument-specific magazines, foundations and international content providers
in order to offer what it considers to be the most comprehensive and highest
quality content to the global online music consumer. N2K currently offers its
consumers access to approximately 145,000 CD and cassette SKUs produced by
others (representing all of the approximately 110,000 titles currently
available) and approximately 50,000 samples of individual recordings, drawn from
approximately 16,000 albums. The Company's sound samples are offered in a MPEG
format. The Company continues to add new sound samples.
 
     Music Genre Approach.  The Company's website strategy is to build worldwide
online communities around specific genres of music where people may socialize
with each other and their favorite artists in a personal environment. The
Company believes that just as music is delivered through other channels like
radio stations, cable television channels such as MTV and special interest
magazines using a genre-specific format,
 
                                       31
34
 
the online music fan will seek out music and product-related information
according to specific genres or artists rather than by a record company label.
The Company believes that organizing its websites by music genres such as rock,
jazz and classical music parallels traditional media formats as well as consumer
buying patterns. In addition, the Company believes its genre websites provide an
attractive forum for the consumer to obtain information on specific artists, and
receive updates about related concert tours, music events and other promotions.
 
     Ease of Use.  The Company believes that ease of use in its websites is
crucial to creating widespread usage and strong brand name recognition.
Therefore, the Company's websites and services feature user friendly and
engaging interfaces for customers to both explore information and order music
and music-related products. To make it more intuitive and visually appealing,
the Company is launching an updated, graphical user interface for Music
Boulevard, scheduled for July 1, 1996. The new interface will provide easier
access to information on Music Boulevard and require a user to register only to
complete an initial purchase. The Company places great emphasis on customer
support in order to maintain high customer satisfaction and establish its
websites as services which deliver product in a timely, efficient manner. The
Company intends to continue to add features that will enhance the ease of use of
its services.
 
     Competitive Pricing.  The Company monitors pricing trends among online
music retail sites, other mail-order music retail businesses and traditional
retailers, and adjusts pricing strategies and tactics as necessary to maintain
competitiveness. The Company expects its competitive pricing policy to be
particularly attractive to certain international music consumers, as retail
prices for CDs in many markets outside of the U.S. tend to be higher than CD
prices domestically. The Company offers its products for sale in the U.S. and
outside of the U.S. at the same price. For the international consumer, the
Company believes that its prices are competitive, even after taking into account
shipping, handling, customs duties and local taxes.
 
     Customer Profiling and Personalized Service.  The Company plans to utilize
information provided by its users to improve product marketing and
merchandising. The Company expects to use this data to enable its users to have
a personalized interactive experience. For example, one of the most popular
areas of Jazz Central Station is the "listening car" where users can look up
their favorite recording artists and access those artists' favorite recordings.
 
     Foreign Language Websites.  In order to reach the global audience served by
the Internet and commercial online services effectively, in selected foreign
markets the Company intends to develop its online communities in the local
language. These websites incorporate localized content and will later feature
local artists. When consumers in these countries wish to purchase CDs or
cassettes, they will be directed to the Music Boulevard website which will also
provide ordering instructions in their native language. The first foreign
language website will be launched in Japan in June 1996. The Company believes
that the launch of N2K Japan represents a critical step in its strategic
international development, since Japan is the second largest market in the world
for recorded music.
 
  Benefits to Industry Participants
 
     A New, Complementary Music Distribution Channel.  By designing an effective
multimedia marketing, promotion and delivery system on the Web, the Company
offers traditional record labels a cost-effective and efficient means to market,
sell and distribute music products on a worldwide basis. Through traditional
music retail channels, an album's worldwide marketing, promotion and
distribution requires substantial coordination, organization and expense. Today,
a new release is typically promoted through radio airplay, print advertising,
music videos and concert tours. Due to the growth in recent years of the number
of new releases, the promotion of new artists has become a more complex task.
Marketing efforts must cover a greater number of releases and each release
competes for the attention of consumers. See "-- Industry Overview -- The
Recorded Music Industry." The Company's online service is designed to simplify
this process by providing every user access to music and recording artists on
the first day of a product's release. Distribution over the Web and online
services offers content to some marketplaces in which this content was
previously unavailable on a timely basis. In addition, Internet merchants'
requirements for physical store premises, warehouses and distribution centers
are greatly reduced, and in some cases eliminated, by allowing shipment directly
from the
 
                                       32
35
 
distributor to the consumer. The Company believes that utilizing this new online
distribution channel will create a shift in the marketing of recorded music.
 
     Global Reach and Targeted Audiences.  The global reach of the Internet and
online services provides advertisers with opportunities to reach a broad
audience by targeted market segments. As the Company adds foreign language sites
and international operations, it may offer local advertisers additional
opportunities to market products and services for highly focused, defined
audiences around the world. In addition, the Company plans to gather, process
and analyze data resulting from customer usage of its websites and purchases to
enhance the ability of music industry participants and other advertisers to
target their promotional efforts.
 
     Direct Links Between Recording Artists and Fans.  The Company's music genre
websites and artist-specific websites offer one-on-one communications between
artists and their music fans. These websites allow artists to be showcased in a
multimedia environment with direct access to their fans and, conversely, provide
users with star access, such as via chat lines to music recording artists. The
Company believes that its ability to offer artists a direct link to fans may
attract artists to the N2K Encoded Music label.
 
ENTERTAINMENT PRODUCTS AND SERVICES
 
  Websites
 
     The Company believes it is creating strong brand names in Music Boulevard,
Rocktropolis and Jazz Central Station and seeks to build brand awareness for
each of its music genre websites by providing services with high entertainment
value, leading-edge technology, ease of use and a high level of customer
support. The Company believes that its strong industry relationships with music
publishers, recording artists, record producers and record labels provide access
to a broad range of content which, when combined with the expertise of its
multimedia content development and editorial staff, results in visually
captivating and content-rich websites. By offering content according to music
genre websites, each of which has its own universal resource locator or "URL,"
the Company believes that it can increase traffic to its websites and expand the
amount of time per user visit on its websites. Consumers can access the
Company's Music Boulevard website directly over the Web, through music genre or
artist websites such as Jazz Central Station, Stonesworld and the David Bowie
website, all of which are hotlinked with Music Boulevard, or through online
search directories such as Infoseek, Lycos, Netscape and Yahoo! The Company
believes that both users and advertisers prefer websites with distinct URLs
designed for specific audiences and that this approach enhances the Company's
ability to promote content within each website, encourages more users to
bookmark the Company's websites and attracts greater numbers of third-party
hypertext links to the Company's websites.
 
     The Company intends to establish an advisory board for each of its music
genre websites, comprised of artists, executives, promoters, writers and
educators active in the music industry and focused on that particular music
genre. The Company believes that the combined expertise of its existing and
planned advisory boards will allow it to support the accuracy and authenticity
of each site's information, demonstrate the quality of its products and services
through the advisory boards' stamp of approval, remain on the cusp of new
industry trends and developments and form new strategic partnerships through
which to further enhance and develop its sites.
 
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     The Company's existing and currently planned websites include:
EXISTING WEBSITES       LAUNCH DATE                        DESCRIPTION
- -------------------------  -------------   ----------------------------------------------------
musicblvd.com............  August 1995     Flagship website of the Company offering
                                           cross-genre, multimedia music information and
                                           merchandise. Music Boulevard is the recipient of the
                                           1995 IIA Award for Best Consumer Website.
jazzcentralstation.com...  January 1996    Genre entertainment website for the global jazz
                                           online community, exploring the contemporary and
                                           traditional worlds of jazz through multimedia
                                           elements. Jazz Central Station is the recipient of
                                           both the 1996 America Online -- Online Music Award
                                           for Best Jazz Cybersite and the 1996 New Media
                                           Invision Award for Best Music-Related Online Site.
rocktropolis.com.........  June 1995*      Genre entertainment website for the global online
                                           rock and pop community, emphasizing high-end
                                           graphical style.
stonesworld.com..........  November 1995   Rolling Stones website featuring innovative
                                           graphics, multimedia elements and album-oriented
                                           content.
davidbowie.com...........  September
                           1995            David Bowie website featuring state-of-the-art
                                           graphics, themed multimedia elements and constantly
                                           updated content.
- --------------------------------------------------------------------------------
PROPOSED
    PLANNED WEBSITES        LAUNCH DATE                        DESCRIPTION
- -------------------------  -------------   ----------------------------------------------------
classicalinsites.com.....  Late 1996       Planned genre entertainment website for the global
                                           online classical music community, exploring Leonard
                                           Bernstein's life and world of classical music
                                           through multimedia elements.
blues....................  1997            Planned genre entertainment website featuring the
                                           Company's recently acquired blues master recordings,
                                           representing blues artists throughout the Southern
                                           U.S.
* Acquired by the Company in June 1996.
 
     Existing Websites.  Music Boulevard is a comprehensive, multimedia music
entertainment resource providing music merchandise and information in an art
deco setting. Launched on the Web in August 1995, Music Boulevard features a
music merchandising center with an approximately 110,000 title catalog, advanced
search functions, 30-second sound samples in a MPEG format, cover art, photos
and song lists. The website also features Music Wire and @Country, the Company's
exclusive daily online music newspapers, edited and written by professional
music journalists, which provides music news, album reviews and concert
information, as well as editorials, artist profiles and product information.
Music Boulevard's editorial staff provides original reporting and reviews
related to the music world which, unlike weekly trade magazines, are immediately
available to consumers and are continuously updated throughout the day. Music
Boulevard also offers Billboard chart listings and access to other major music
publications including Blues Revue, Dirty Linen, e.Bop, Fanfare, Gramophone,
Puncture and SPIN.
 
     The Company sells advertising on and recorded music CDs and cassettes and
related music merchandise through Music Boulevard. Prior to purchasing CDs,
cassettes or other merchandise, a consumer can access a variety of information
about an artist or music group, a song or title or a music genre and can sound
sample various music titles. The Company believes that by offering the consumer
a rich, entertaining buying experience, coupled with the ability to easily
locate a specific artist or song through the Company's proprietary search
engine, it differentiates the N2K purchasing experience from that of many of its
competitors. In addition, the Company offers the consumer the option to purchase
from a selection of approximately 145,000 CD and cassette SKUs produced by
others (representing all of the approximately 110,000 titles currently
available) and to sound sample from a selection of approximately 50,000 tracks.
The Company believes that its sites also offer the broadest range of sound
samples currently available online.
 
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37
 
     Jazz Central Station is an in-depth jazz, multimedia music entertainment
and information resource for the global jazz community. Jazz Central Station
explores the contemporary and historical worlds of jazz through text, graphic
and multimedia elements, with featured areas including: Featured Artists,
Recommended Listening, Record Company Cargo Area providing information on jazz
record labels and their artist releases, Musician's Express featuring master
classes by acclaimed jazz artists as well as educational information, Jazz
Destinations highlighting jazz events and venues worldwide and Jazz Cafe
interviews with musicians in RealAudio. Other features include forums, live
chats, cover art, videos, photos, liner notes, reviews, biographies, concert
calendars and educational information. Jazz Central Station is also the official
website for JazzTimes, the International Association of Jazz Educators, George
Wein's Festival Productions, producer of the JVC Jazz Festivals, and the
Monterey Jazz Festival of 1996. In addition, Jazz Central Station includes
artist sites for Chick Corea, Herbie Hancock and Gerry Mulligan. The Company
believes that the programming content provided by JazzTimes magazine (in the
form of highlights of each current issue and archives of past issues) combined
with its experienced editorial staff of writers enables it to provide high
quality, timely and engaging editorial content to its users. Further, in 1996
Jazz Central Station inaugurated the first annual JCS Global Jazz Poll, in which
its online users voted for their favorite artists. The winners have been chosen
and selected winning tracks are being compiled for one of the Company's initial
releases under the N2K Encoded Music label in October 1996. In addition, a
concert event featuring Dave Grusin and the Jazz Central Station all-stars is
scheduled in Japan in connection with the launch of the Company's Japanese
website. Jazz Central Station has an acclaimed Board of Advisors including Chick
Corea, Quincy Jones, Ramsey Lewis, Bruce Lundvall, Dan Morgenstern and George
Wein.
 
     Rocktropolis is an online community that presents high-end graphic style to
create an entertaining, interactive environment for the rock and roll consumer.
Featured areas include: Trash and Chat at the Fins Motel, Featured Artists, In
Spite, the website's own online Hollywood tabloid, The Love Parlor, City Jail
and Musicians Exchange. In addition, users can explore featured artists'
histories and current news through videos, interviews, recommended listening,
e-mail and online chats. In addition, Rocktropolis features the websites of
Sting and The Artist Formerly Known as Prince. Further, the website features its
own Ozone magazine, which covers today's rock music scene with interviews,
reviews and observations.
 
     In late 1996, the Company plans to enhance its Rocktropolis and Music
Boulevard websites by including an alternative rock and pop online music
magazine that targets the music and cultural interests of alternative rock
consumers by interviewing and reviewing current and emerging rock bands, artists
and cultural trends. The magazine will provide daily music news, album reviews,
in-depth special features, offbeat pop culture articles, weekly writers' columns
and scheduled chat events. In addition, the Company intends to offer
sophisticated indexing and searching techniques to allow quick and efficient
access to past content. This feature will be accessible through both the Music
Boulevard and Rocktropolis websites. The Company recently hired Rob Lord, a
founder of IUMA, Internet Underground Music Archives, to oversee the development
of the alternative rock and pop online music magazine.
 
     Stones World is a Rolling Stones website with heavy emphasis on the album
Stripped and the Voodoo Lounge CD-ROM. The website features a comprehensive
catalog of the Rolling Stones' music, comprised of five separate sections:
EXTRA, PAST, STRIPPED, CD-ROM and FUTURE. This website incorporates leading-edge
animation, streamed real time audio and sound samples as well as archival
photos, band and concert information, interviews, full lyrics and an interactive
poker game.
 
     David Bowie's Outside takes visitors inside the murder-mystery world
explored in Bowie's short story, "The Diaries of Nathan Adler." The website
features streamed animation, state-of-the-art graphics, sound samples, band
biographies, concert information, interviews, cover art, the full text of "The
Diaries of Nathan Adler" and information on Bowie's latest releases and tours.
In addition, the website contains a special section devoted to David Bowie
himself which features the artist's websites and samples of his own digital art.
 
     Planned Internet Sites.  In late 1996, the Company plans to launch a
classical music genre website (WWW.CLASSICALINSITES.COM) which will offer a
comprehensive guide to the world of classical music. The website will enable the
user to explore the history of classical music, listen to performances and
discussions by legendary artists, seek out worldwide classical events and
purchase music and related merchandise online.
 
                                       35
38
 
Planned features include: artist exhibits, recommended listening areas, video
and product reviews, online access to the fine arts collection at the Library of
Congress, a music learning center, online chats with artists, producers and
Company staff and listings for worldwide classical radio, tour schedules,
concerts and festivals. The Company recently finalized an agreement with the
Leonard Bernstein estate which will establish WWW.CLASSICALINSITES.COM as the
online website of Leonard Bernstein's life and world of classical music,
featuring a retail area, educational room, tour of his studio, articles on his
artistic legacy and current classical music activities. The Company intends to
position its classical website as the definitive website for the classical
enthusiast, from novice to professional, to locate, explore and learn about
classical music.
 
     In 1997, the Company plans to launch a blues genre website featuring the
Company's recently acquired blues recordings representing blues artists
throughout the Southern United States. Planned additional blues genre website
features include photos, interviews, song lists, artwork and videos.
 
     The Company's planned websites have not yet been fully developed. No
assurance can be given that the Company's planned websites will be launched with
the features currently planned or at the time presently scheduled or at all.
 
  Planned Record Label
 
     Management plans to develop N2K Encoded Music as a full-service music
company that will create, produce, license, acquire, and market high-quality
recorded music which will be distributed through online as well as through
traditional retail and other distribution channels. In building and expanding
the N2K Encoded Music label across all music genres, the Company will license
master recordings from other labels, acquire master recordings and publishing
catalogs and sign artists to the label. The Company expects that all of its
releases will be in the Enhanced CD format, which utilizes advanced recording
techniques while incorporating quicktime video clips, interviews, text and an
integrated, seamless link to the Company's online sites. The Company believes
that the E-CD format will create more visibility for the Company's websites as
it offers and highlights multimedia features for the computer users. The Company
believes that by adding multimedia information to an audio compact disc, the
E-CD format will optimize available CD space and provide an economical marketing
tool for artists to reach their fans. This feature represents a new approach
that the Company expects to bring to its online CD sales; however, the Company
anticipates that in the short-term the majority of N2K Encoded Music's new E-CD
recordings will be sold in traditional record stores. Currently, the Company
believes that no other record label is offering all of its new music recording
products as Enhanced CDs and believes that this strategy will give the Company a
marketing advantage in the industry.
 
     In addition, just as the growth in consumers' purchases of audio CDs was
stimulated by the growth in audio CD players beginning in the early 1980s, the
Company believes that the growth in the sales of CD-ROM equipped personal
computers will stimulate consumer purchases of Enhanced CDs. For example, in
1994, over 50% of home personal computers purchased were CD-ROM equipped.
 
     In the Fall of 1996, N2K Encoded Music's two initial releases will feature
a compilation recording of outstanding jazz musicians selected through Jazz
Central Station's first online global jazz poll and a retrospective artist
release from Gerry Mulligan, which will include two new original tracks. N2K
Encoded Music's first blues release is planned for February 1997, in the form of
an all star duet album, which is planned to coincide with the Company's
anticipated launch of its blues website. In addition, the Company has acquired
numerous master recordings of previously undiscovered blues artists from
throughout the Southern U.S., of which a number will be released on a quarterly
basis beginning in 1997.
 
     As part of the Company's strategy to establish the N2K brand name, all of
N2K Encoded Music's label releases are currently planned to include
comprehensive media campaigns tied to promotional events. For example, the
Company's first blues release is scheduled to coincide with Black History Month
in February 1997 and to be promoted online, in magazines and on radio, with
corresponding music-related merchandise offerings. The Company plans to price
its Enhanced CDs on a comparable basis with other music CDs.
 
     The Company has not yet launched N2K Encoded Music, nor has it released any
recordings. In attempting to establish its planned record label, N2K will face
risks inherent in the recorded music industry.
 
                                       36
39
 
See "Risk Factors -- Risks Inherent in Recorded Music Industry and Record Label
Launch." No assurance can be given that the Company will be successful in
establishing and building its planned record label.
 
  Entertainment Products and Services Marketing
 
     Website Promotion.  The Company has developed a strategy to promote its
Music Boulevard website to record labels through links with record label
websites and through its relationship with Soundscan. The Company believes that
a no-fee hotlink between Music Boulevard and label websites will be extremely
attractive to record companies who cannot sell directly on their own websites
because of conflicts with partnered retailers. Hotlinks are established through
an icon on the record label website, which advertises that a particular album or
act is available for purchase on Music Boulevard. By clicking on the icon, a
user is able to enter Music Boulevard to browse or purchase. In its relationship
with Soundscan, the Company shares its weekly records of recorded music
transactions taking place on its Music Boulevard website. Soundscan uses this
information, along with data from the vast majority of music retail locations
nationwide to tally U.S. music sales. Such data are the exclusive criteria in
compiling the Billboard magazine charts.
 
     In order to generate site traffic and coordinate advertising among its
various sites, the Company advertises through online search directories such as
Infoseek, Lycos, Netscape and Yahoo!, as well as on selected music websites. The
Company's strategy in advertising online is to attract high volume traffic onto
the websites. The Company also barters advertising space with magazines such as
JazzTimes and Details in exchange for print advertisements.
 
     Advertising Sales and Sponsorships.  Although the market for
Internet-related advertising represents only a small portion of today's total
advertising market, industry sources project rapid growth for this sector. While
the Company believes that content providers will be the driving force for the
growth of the Internet and online services, it expects that as a result of this
growth, these channels will attract more advertising and sponsorship revenues.
The Company believes that additional factors of importance to advertisers
include audience size, user base demographics, ability to target market,
interactive capability and the online medium's overall advertising
effectiveness. In order to enhance the attractiveness of its websites to
advertisers, the Company intends to deploy an advertising management software
system to facilitate site traffic management, as well as advertising space
management and implementation. The Company is currently evaluating proposals for
third-party independent auditing and verification of the Company's site traffic.
These enhancements will improve the Company's ability to market its websites
aggressively for targeted advertising (by demographics or genre). The Company
has just begun to sell banner advertising on Music Boulevard. With the re-launch
of the Music Boulevard user interface, the Company's plans include an increased
emphasis on generating advertising sales.
 
     Merchandising.  The Company's merchandising strategy is based upon
generating traffic on its websites, because the Company believes that increased
website traffic will generate more music and music-related merchandise sales. To
support this strategy, the Company's merchandising efforts are designed to
entertain, inform and stimulate the user along his or her way to purchasing
music products. N2K provides a variety of merchandise and, in its view,
compelling content, to encourage online users to visit its websites. The Company
believes that its editorial commitment to high-quality music-related content
offered free of charge is an important differentiator from other music-related
and music-merchandising sites. A key aspect of the Company's merchandising
strategy is to link its music genre, artist and title-specific content, such as
record reviews, artist profiles and special promotions, to the music ordering
section of Music Boulevard, to both stimulate and facilitate consumer purchases
of CDs and other music products. The Company seeks to differentiate itself in
the marketplace by providing a diverse product mix of music and related
merchandise and become a convenient one-stop online store for music lovers.
 
     The Company facilitates repeat buying by allowing buyers to choose a
password on their first sale. This password eliminates the need for the buyers
to re-input credit card and shipping information and makes the next purchase a
much simpler process. The Company also plans to implement a frequent buyers club
membership program in connection with the scheduled re-launch of the Music
Boulevard user interface on July 1, 1996, whereby members in the Company's
online club will receive discounts on music product
 
                                       37
40
 
purchases. The Company considers the club concept a powerful marketing tool, the
ultimate value of which is the ability to collect user demographics and through
a club discount, attempt to obtain all or a greater portion of a member's online
music purchases.
 
     The Company monitors pricing trends among online music retail sites, other
mail-order music retail businesses and traditional retailers and adjusts pricing
strategies and tactics as necessary to maintain competitiveness. The Company
seeks to encourage the purchase of multiple titles by capping shipping costs and
guaranteeing two-day delivery within the U.S. for purchases of five titles or
more. To date, the Company estimates that the average purchase on Music
Boulevard is approximately three CDs or cassettes per order.
 
     Global Sales.  Over 35% of the Company's online sales to date have been
generated in non-U.S. markets. Over the past several years, international music
sales have been growing faster than domestic music sales. The Company believes
that its Internet and online distribution channels, the Web and online services,
are well positioned to participate in this international growth. In addition to
selling current releases, the Company offers a comprehensive product line not
generally available in most international markets. N2K believes that it can
enhance its global user base by providing localized content on all of its online
sites. To achieve this objective, the Company plans to build websites in
different languages, beginning with a Japanese language website which will be
launched in June 1996. Additionally, the Company plans to establish N2K Asia to
service the Southeast Asian market. The Company plans to mirror these operations
in the European market and provide localized content and up-to-date information
on local music scenes.
 
  Fulfillment and Customer Service
 
     The Company places an emphasis on product fulfillment in order to maintain
high customer satisfaction, price competitiveness and establish the Company's
websites as services which deliver product in a timely and efficient manner. The
Company uses Valley, a third-party fulfillment operation, to ship CDs and
cassettes, while handling all of the customer billing functions itself. Credit
card authorization is also handled by a third party, First USA, Inc. See "Risk
Factors -- Dependence on Key Suppliers."
 
     The Company believes that high levels of customer service and support are
critical to the value of its services and to retaining and expanding its user
base. While it is common to find an e-mail feedback mechanism on most Internet
services, the Company believes that its level of customer service support
(staffed 76 hours a week, accessible via phone and e-mail) is uncommon. The
Company provides customers with the opportunity to communicate via e-mail,
facsimile and toll-free and local telephone numbers. Company representatives
handle general questions about the service as well as register customers' credit
card information over the phone. The Company believes that these representatives
are a valuable source of feedback regarding user satisfaction, which the Company
uses to improve its services. Customers of the Company are not charged for
service and support.
 
N2K INFORMATION SERVICES
 
     In the information services business, the Company has offered online
business information retrieval services since 1984. The Company's principal
service in this area is EasyNet, a premium-priced reference service licensed to
online content distributors, primarily CompuServe (under the brand name IQUEST)
and NIFTY (under the brand name INFOCUE). This service offers business credit
data, research reports, company fact sheets and newsletters, as well as general
reference information such as newspapers and magazines, from more than 1,000
sources. Historically, the Company has generated information services revenues
through transactional charges to its distributors for their customers' use of
the services.
 
     The online information services business has become more competitive and
price sensitive as general reference content, such as newspapers and magazines,
has become increasingly available over the Internet at minimal or no cost to the
user. Recognizing the changing competitive environment, the Company re-focused,
beginning in 1995, its online information services strategy, resources and
business approach in three key areas by (i) continuing to serve its existing
distributors by emphasizing its premium database content; (ii) developing new
Web-based services and software packages to deliver its database content to
business
 
                                       38
41
 
market niches such as the SOHO market and (iii) creating proprietary databases
for targeted marketing to music consumers.
 
     In June 1995, the Company unbundled IQUEST services and lowered its prices,
thereby significantly reducing the Company's revenues. The Company's unbundling
strategy was intended to competitively position EasyNet and highlight the
service as a source of premium databases. The Company believes that these
databases, which include information such as credit reports, intellectual
property information, scientific research and government reports, are less price
sensitive than general reference information. In addition, the Company is
transitioning from a textual user interface to a more graphical user interface.
The Company has designed its graphical user interface to offer easy, integrated
access to key business and research resources such as D&B Information, UMI,
Thomson & Thomson, Derwent, IAC and TRW.
 
     The Company has also recognized the growing consumer and small business
usage of online services, and has responded by expanding its current offerings
to include web-based software and information services for the business and SOHO
markets. In conjunction with Knight-Ridder, the Company has developed desktop
software packages to provide access to databases and information sources that
focus on the specialized needs of the business and professional markets. These
products are currently available using N2K's customized versions of Windows
software and are marketed as Knight-Ridder's Custom DIALOG and DIALOG
Quickstarts, Engineering Information's EISE and Thomson & Thomson's T&T
Trademark Center. To date, key applications targeting the specific needs for
engineering, intellectual property, market research, medicine and health and
pharmaceuticals information have been developed for the business and SOHO
markets. The Company supports the marketing efforts of its publishers for these
applications.
 
     The Company plans to use its content aggregation and database management
experience from its online information business in order to gather, process and
distribute proprietary music databases to enhance the Company's ability to
target market to music consumers. In building these databases, the Company will
aggregate information provided voluntarily from its users, regarding the online
music consumers' preferences, habits and desires, which will be organized around
such factors as music genre, geographic distribution and consumer demographic
profile. The Company believes that this information will be important to improve
product marketing and merchandising for the Company, music industry companies
and advertisers.
 
N2K TECHNOLOGY
 
     Over the past twelve years, the Company has developed sophisticated
information services delivery and user tracking systems by integrating
third-party systems, when available, and by developing proprietary tools. The
Company's integrated systems and tools provide functionality in five primary
areas: (i) multimedia asset management, (ii) website development, (iii) audio
encoding and delivery, (iv) fault tolerance and (v) security. At the same time,
the systems and tools provide scalability to maintain performance as the number
of users of the system and the amount of data processed increases and
extensibility to add new functionality as new needs and technologies emerge.
 
     Multimedia Asset Management.  Central to the Company's system is a database
management system necessary to index, retrieve and manipulate the Company's
continuously growing multimedia content in a distributed (multi-site)
environment. The database management system allows for rapid searching, sorting,
viewing and distribution of, among other things, audio samples, video clips,
cover art, photos and original art. The Company has chosen Oracle 7.3 as its
database management system and was an early adopter of Oracle Media Objects,
which it uses for the multimedia asset management application. Based on the
quality and creativity of the Company's interfaces, Oracle Corporation selected
the Company as one of its featured developers for Oracle Open World, its
infomercial and international product roadshow which was introduced in 1996.
 
     Website Development.  The catalog of CDs and cassettes, stored in an Oracle
database, forms the core of the music entertainment content collection and
contains links to related content (e.g., audio samples, images, editorial
content and charts.) Each individual page of the Company's Music Boulevard
website is built dynamically from these elements using a proprietary web page
template technology. This template technology results in the separation of the
page look and feel from the individual data elements, which eliminates software
 
                                       39
42
 
updates for page layout changes and greatly reduces the programming required to
maintain a growing amount of content. The Company has developed software
specifically to enable its editorial and creative staff to develop content
tightly linked into this environment. As a result, the Company can efficiently
import editorial content from third-party sources such as magazines. For
high-volume, non-secure Web transactions the Company uses the Apache web server,
a modular, high-performance server. A senior member of the Company's technical
staff is a member of the Apache development team.
 
     Audio Encoding and Delivery.  The ability to deliver the highest possible
audio quality to the user's desktop is fundamental to the Company's strategy.
The Company chose MPEG compression for its audio samples because of its superior
quality and has invested in developing high-quality downloadable sound samples
at up to a 40:1 compression ratio. In light of current user patterns, the
Company also uses Progressive Networks' RealAudio 2.0 format for delivering
realtime streaming audio samples in certain of its websites. The Company is
actively pursuing new and emerging audio technologies.
 
     Fault Tolerance.  The Company has operated a 24-hour a day, seven-day a
week computing facility in the online information industry for many years.
Drawing on this experience, the Company's website architecture uses redundant
servers and RAID (redundant array of independent drives) storage systems so that
downtime due to system outages or maintenance needs is minimized. The Company
runs its Oracle database on the Sun Enterprise 4000 server because of its fault
tolerant characteristics including redundant, hot-swappable components. To
further enhance fault tolerance, the Company expects to run Oracle's parallel
database version as soon as possible. See "Risk Factors -- Risk of System
Failure or Inaccuracy."
 
     Security.  The Company believes that a high level of security is necessary
in order to conduct commerce over the Internet. The Company employs a
proprietary firewall to keep its Internet connections secure. The Company uses
the Netscape Commerce Server for secure electronic transactions over the
Internet. It uses proprietary EDI (electronic data interchange) interfaces and
private networks to ensure the security of customer credit card transactions and
other order information shared with the Company's fulfillment partner and third
party billing company. The Company plans to implement standardized electronic
transaction mechanisms (such as Secure Electronic Transaction technology, the
standard being developed by major credit cards) as they become commercially
available.
 
     Scalability and Extensibility.  The structure of the Company's hardware and
software is built upon a distributed transaction processing model which allows
software to be distributed among multiple parallel servers. This architecture
allows the Company to scale by either adding new servers or increasing the
capacity of existing servers. The current system is designed to easily scale
from several hundred simultaneous users to at least five thousand users while
maintaining both user performance and cost per transaction. In the rapidly
changing Web environment, the ability to update the application system to stay
current with new technologies is important. The system's template technology and
modular database design allow the addition or replacement of server-based
applications such as multimedia formats and delivery systems, additional EDI-
based fulfillment partners and search and retrieval engines. This architecture
also enables low cost, rapid deployment of additional websites that integrate
with the shopping and genre websites.
 
     Advanced Technologies.  The Company continually evaluates emerging
technologies and new developments in Web and CD authoring. Technologies with
which the Company is currently working include Sun's Java language and related
tools for creating intelligent client-side applets, Virtual Reality Modeling
Language (VRML) for developing three dimensional environments, emerging
electronic payment and transaction methods, high bandwidth delivery media,
Macromedia Director software and Apple Media tools to link Enhanced CDs to the
Company's websites, the Real Time Protocol (RTP) for orderly delivery of
multimedia content over the Internet and efforts to re-engineer streaming audio
technologies using existing high-quality compression algorithms.
 
                                       40
43
 
COMPETITION
 
  Music Entertainment
 
     The market for Internet and online service and content providers is highly
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of websites on the Internet competing for consumers'
attention and spending has proliferated. Currently, there are more than one
hundred music business purchase point sites on the Internet and, with no
substantial barriers to entry, the Company expects that competition will
continue to intensify. In addition to competing with independent Internet
retailers and traditional music retail chains with websites on the Internet, the
Company competes with traditional retail stores, including chains and
megastores, catalog merchandisers, music clubs and telephone retailers.
 
     The Company believes that the primary competitive factors in providing
music entertainment products and services via the Internet are name recognition,
variety of value-added services, ease of use, price, quality of service,
availability of customer support, reliability, technical expertise and
experience. The Company believes that its success in this market will depend
heavily upon its ability to provide high quality, entertaining content in an
easy to navigate format, along with cutting-edge technology and value-added
Internet and online services. Other factors that will affect the Company's
success in this market include the Company's continued ability to attract
experienced marketing, sales and management talent, and the expansion of global
support, training and field service capabilities. The Company believes that its
editorial commitment to high-quality music-related content offered free of
charge is an important differentiator from other music-related and
music-merchandising websites. N2K Encoded Music will compete directly with
established record label companies and with other music producers and
distributors, any of which have significantly greater financial, technical and
marketing resources, longer operating history, greater name recognition and more
established relationships with advertisers than the Company. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors.
 
  N2K Information Services
 
     The Company's information services products face current and potential
competition from numerous online and Internet content providers who serve the
consumer and professional markets. There are few barriers to entry, and current
and new competitors can launch new sites at relatively low cost. This
competition falls primarily into the following three broad categories, (i) low
cost content providers, (ii) vertical content aggregators and (iii) suppliers of
the Company's content. The Company believes that the primary competitive factors
in providing online information to the consumer and business professional user
market include the quality of content, the demographics of the Company's online
consumers and pricing. Given the intense competition among online and Internet
content providers, there can be no assurance that the Company will be able to
compete successfully against current or future competitors with respect to any
of these competitive factors.
 
     Many of the Company's current and potential competitors in the music
entertainment and online information services businesses have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and larger existing customer bases than the Company. In
addition, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products or services
than the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors.
 
EMPLOYEES
 
     As of May 31, 1996, the Company had 108 full-time employees, including 69
in operations and development, 23 in sales and marketing and 16 in general and
administrative. As of May 31, 1996, the Company also had 22 part-time employees,
primarily focused on customer service and 12 consultants, primarily focused on
the Company's music entertainment business. The Company's future success
depends, in significant part, upon the continued service of its key technical,
editorial, sales, product development and
 
                                       41
44
 
senior management personnel and on its ability to attract and retain highly
qualified employees. There is no assurance that the Company will continue to
attract and retain high-caliber employees, as competition for such personnel is
intense. The Company's employees are not represented by any collective
bargaining organization. The Company has never experienced a work stoppage and
considers relations with its employees to be good.
 
TRADEMARKS AND PATENTS
 
     The Company owns trademarks for Music Boulevard, Telebase, Telebase with
Logo, EasyNet, Corporate EasyNet, ANALY$T, ARTIST Gateway and Knowledge Gateway.
Trademark applications have been filed for Music Blvd., Jazz Central Station and
Rocktropolis. In connection with its Jazz Central Station trademark application,
the Company has received notice of a challenge to its application by another
entity claiming prior use of the name. Although the Company believes it will
prevail, if successfully challenged, the Company may have to pay royalties for
or change the Jazz Central Station name. The Knowledge Gateway Computer (KGC)
system is based upon technology that is patented under U.S. Patent #4,774,655,
issued to the Company in 1988 and expiring in 2005. This patent relates to the
fundamental gateway aspects of the KGC system.
 
FACILITIES
 
     The Company's corporate headquarters are located in the New York
Information Technology Center ("NYITC") in New York, New York. The Company
leases its facilities and certain other equipment under operating and capital
lease agreements. The Company entered into a new lease agreement for
approximately 13,300 square feet of office space at NYITC commencing on December
22, 1995. NYITC's facilities offer advanced technology amenities including state
of the art voice, video and data transmission and advanced telecom and data
security. The term of the lease expires on May 31, 2001. The Company has entered
into a lease agreement for an additional approximately 7,700 square feet in the
NYITC.
 
     The Company leases an additional 15,000 square foot facility in Wayne,
Pennsylvania which houses the Company's main computer facility. The term of the
lease expires on August 31, 2001. The Company has signed a lease agreement for
additional space of approximately 6,400 square feet at the Wayne, Pennsylvania
facility. There can be no assurance that a system failure at this location would
not adversely affect the performance of the Company's services.
 
     The Company believes that its existing facilities are adequate for its
current requirements and that additional space can be obtained to meet its
requirements for the foreseeable future.
 
LITIGATION
 
     The Company and 17 other entities have been named as defendants in a civil
action captioned Interactive Gift Express v. CompuServe, Inc. et al., which is
pending in the U.S. District Court, Southern District of New York, Docket 95 CV
6871 (BSJ). The plaintiff in this action alleges infringement of certain
intellectual property rights, and seeks treble damages and costs in an
unspecified amount, as well as other declaratory and injunctive relief. The
Company believes that the claims against it are without merit and intends to
vigorously defend against them. The Company believes that this lawsuit, even if
adversely determined, will not have a material adverse effect on the Company's
business, financial condition or results of operations.
 
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45
 
                                   MANAGEMENT
 
OFFICERS AND DIRECTORS
 
     The following table sets forth the names, ages and positions of the
Company's executive officers and members of the Board of Directors as of the
date of this Prospectus:
NAME                    AGE            POSITION WITH COMPANY
    ---------------------------------------  ---   ---------------------------------------
Lawrence L. Rosen(1)...................  56    Chairman of the Board of Directors and
                                                     Chief Executive Officer
    Jonathan V. Diamond....................  37    Vice Chairman and Director
    Robert David Grusin....................  61    Vice Chairman and Director
    James E. Coane.........................  55    President, Chief Operating Officer and
                                                     Director
    Bruce Johnson..........................  46    Vice President, Secretary, Treasurer
                                                   and Chief Financial Officer
    Jerold Rosen...........................  27    Senior Vice President and General
                                                     Manager-Online Entertainment
    Daniel E. Meyer........................  39    Senior Vice President and General
                                                     Manager-Online Information
    Robert C. Harris, Jr.(1)(2)............  49    Director
    Susanne Harrison(1)(2).................  51    Director
- ---------------
 
(1) A member of the Compensation Committee.
 
(2) A member of the Audit Committee.
 
     Prior to the Merger, certain of the individuals listed below served as
executive officers and directors of New York N2K, while others served as
executive officers and directors of Telebase.
 
     Lawrence L. Rosen has served as Chairman of the Board of Directors since
the Merger. Mr. Rosen has served as Chief Executive Officer of the Company since
the Merger. From June 1995 until the Merger, Mr. Rosen was Co-Chairman of New
York N2K. Previously, Mr. Rosen and Mr. Grusin formed Grusin/Rosen Productions
in 1976 to produce artists' recordings for major record labels. Mr. Rosen served
as engineer, producer and Co-President, operating under a global distribution
agreement with Arista Records. In 1982, Mr. Rosen co-founded GRP with Mr.
Grusin, and it became one of the first worldwide record labels to adopt an
all-digital, all-CD philosophy, with Mr. Rosen as its Co-President. In 1990, GRP
was acquired by MCA Inc. and Mr. Rosen served as President and Chief Executive
Officer to operate GRP as a division of the MCA Music Entertainment Group until
1995. Mr. Rosen has served as a member of the Board of Governors of the New York
Chapter of the National Association of Recording Arts and Sciences, is a member
of the Grammy Screening Committee and serves on the Board of the National
Foundation for the Advancement of the Arts. Mr. Rosen attended the Manhattan
School of Music.
 
     Jonathan V. Diamond has served as Vice Chairman and a director of the
Company since the Merger. From June 1995 to the Merger, Mr. Diamond served as
Co-Chairman of New York N2K. From 1991 to 1995, Mr. Diamond founded and was
Chairman of the J. Diamond Group, a holding company which acquired and launched
six media and entertainment companies in the U.S. and the U.K., including
Vermilion Films, which produced the feature film "Let Him Have It." From 1984 to
1990, Mr. Diamond served as a director and Executive Vice President of GRP,
where he was responsible for its business and financial strategy. Prior to his
association with GRP, Mr. Diamond founded Diamond Investments, his own
investment firm, which acquired or launched companies in the media,
entertainment and broadcasting areas. Mr. Diamond has served on the Advisory
Board of Columbia University Graduate School of Business. Mr. Diamond holds a
B.A. in Economics and Music from the Honors College of the University of
Michigan and a M.B.A. from Columbia University's Graduate School of Business.
 
                                       43
46
 
     Robert David Grusin has served as Vice Chairman and a director of the
Company since the Merger. From June 1995 to the Merger, Mr. Grusin served as a
director of New York N2K. In 1976, Mr. Grusin and Mr. Rosen formed Grusin/Rosen
Productions to produce artist recordings for major music labels, which lead to a
label deal with Arista in 1978. In 1982, Mr. Grusin and Mr. Rosen founded GRP as
an independent record company with Mr. Grusin as Co-President. In 1990, GRP was
acquired by MCA Inc. and Mr. Grusin served as Executive Vice President of GRP,
which became a division of the MCA Music Entertainment Group, until 1995. Mr.
Grusin, a composer, producer and musician, is the recipient of ten Grammy Awards
and one Academy Award. Mr. Grusin serves on the College of Music Advisory Board
at the University of Colorado, and has received honorary doctorates from both
Berkelee College of Music and the University of Colorado.
 
     James E. Coane has served as President, Chief Operating Officer and a
director of the Company since the Merger. From April 1987 to the Merger, Mr.
Coane served as President and Chief Executive Officer of the Company and as
Chairman of the Board of Directors from 1993 until the Merger. Previously, from
1984 to 1987, Mr. Coane served as President and Chief Executive Officer of
Morris Decision Systems, Inc., a marketer and supplier of microcomputers and
related peripherals. Mr. Coane serves on the Board of Directors of the
Information Industry Association and the Ben Franklin Technology Council and as
the Chief Executive Officer of the Council of Growing Companies. Mr. Coane is a
Phi Beta Kappa graduate of Duke University with an A.B. in Economics and
Business Administration.
 
     Bruce Johnson has served as Secretary, Treasurer, Vice President and Chief
Financial Officer of the Company since 1988. Mr. Johnson has sixteen years of
previous experience in public accounting and financial management with positions
at Arthur Andersen & Co., Marriott Corp. and SEI Corp. Mr. Johnson holds a
degree in Accounting from St. Joseph's University and a M.B.A. in Finance from
Drexel University and is a Certified Public Accountant.
 
     Jerold Rosen has served as Senior Vice President and General Manager-Online
Entertainment since the Merger. From June 1995 to the Merger, Mr. Rosen served
as President of New York N2K. From 1988 to 1992, Mr. Rosen served in various
capacities at GRP, including serving as head of its music licensing department.
Mr. Rosen holds a B.A. in Political Economics from Tulane University and a
M.B.A. in Finance from Rutgers University. Jerold Rosen is the son of Lawrence
L. Rosen.
 
     Daniel E. Meyer has served as Senior Vice President and General
Manager-Online Information since the Merger. From 1988 to December 1995, Mr.
Meyer was President and founder of Advanced Research Technologies, Inc. ("ART"),
an information gateway company. In December 1995, ART was acquired by and merged
into the Company. Mr. Meyer has served as a product design consultant for the
Company since 1984. Mr. Meyer holds a B.S. from the University of Maryland and a
certificate in Small Business Management from The Wharton School of the
University of Pennsylvania.
 
     Robert C. Harris, Jr. has served as a director of the Company since
February 1996. Mr. Harris is a co-founder and currently serves as a Managing
Director of Unterberg Harris. From 1984 to 1989, he was a General Partner,
Managing Director and Director of Alex. Brown & Sons Incorporated. From 1979 to
1984, he was a Partner of Robertson Stephens & Company. Mr. Harris is a Director
of Microlytics, Inc., Mobile Data Solutions Inc. and a number of private
companies. Mr. Harris is a graduate of the University of California at Berkeley,
where he received B.S. and M.B.A. degrees.
 
     Susanne Harrison has served as a director of the Company since 1993. Ms.
Harrison has been General Partner of the high technology capital funds, Poly
Ventures, Limited Partnership and Poly Ventures II, Limited Partnership, since
1989 and 1991, respectively. Prior to joining Poly Ventures, Ms. Harrison was
Vice President for Technology Investment Banking at Steinberg and Lyman Inc.
from 1983 to 1987. From 1977 to 1982, she held various management positions at
Symbol Technologies, Inc., a supplier of bar-code laser scanners and portable
terminals. Ms. Harrison serves as a director of several privately-held high
technology portfolio companies, as well as a director of the Long Island Venture
Group. Ms. Harrison holds a B.A. from Hunter College, a M.A. from the State
University of New York and a M.B.A. from Adelphi University.
 
                                       44
47
 
     Lawrence L. Rosen, Jonathan V. Diamond, Robert David Grusin, James E.
Coane, Robert C. Harris, Jr. and Susanne Harrison were elected to the Board of
Directors pursuant to a stockholders agreement (the "Stockholders Agreement")
dated as of February 13, 1996, by and among Lawrence L. Rosen, Jonathan V.
Diamond, Robert David Grusin, James E. Coane, Charles C. Wilson III, Poly
Ventures II, Limited Partnership, AT&T Corporation, Gary Lauder and Unterberg
Harris Interactive Media Limited Partnership, CV, in which each party agreed to
vote its shares of capital stock to elect six directors as specified therein.
Simultaneously with the closing of the Offering, the Stockholders Agreement will
terminate in accordance with its terms.
 
     Each director holds office until the next annual meeting of stockholders or
until a successor has been duly elected and qualifies, or until his or her
earlier death, resignation or removal. The Company's executive officers are
appointed annually by the Board of Directors and serve at the discretion of the
Board of Directors.
 
LIMITATIONS ON DIRECTORS' LIABILITY
 
     Liability Limitation.  The Company's Certificate of Incorporation provide
that a director of the Company shall not be personally liable to it or its
stockholders for monetary damages to the fullest extent permitted by the
Delaware GCL. In accordance with the Delaware GCL, the Certificate of
Incorporation does not eliminate or limit the liability of a director for acts
or omissions that involve intentional misconduct by a director or a knowing
violation of law by a director, for voting or assenting to an unlawful
distribution or for any transaction from which the director will personally
receive a benefit in money, property or services to which the director is not
legally entitled. The Delaware GCL does afford persons who serve on the board of
directors of a Delaware corporation protection against awards of monetary
damages for negligence in the performance of their duties as directors. The
Delaware GCL does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care. Any
amendment to these provisions of the Delaware GCL will automatically be
incorporated by reference into the Certificate of Incorporation, without any
vote on the part of its stockholders, unless otherwise required.
 
     Indemnification Agreements.  Simultaneously with the completion of the
Offering, the Company and each of its directors will enter into indemnification
agreements. The indemnification agreements will provide that the Company will
indemnify the directors against certain liabilities (including settlements) and
expenses actually and reasonably incurred by them in connection with any
threatened or pending legal action, proceeding or investigation (other than
actions brought by or in the right of the Company) to which any of them is, or
is threatened to be, made a party by reason of his or her status as a director,
officer or agent of the Company or his or her serving at the request of the
Company in any other capacity for or on behalf of the Company, provided that (i)
such director acted in good faith and in a manner at least not opposed to the
best interests of the Company, (ii) with respect to any criminal proceedings,
such director had no reasonable cause to believe his or her conduct was
unlawful, (iii) such director is not finally adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the Company,
unless the court views in light of the circumstances that the director is
nevertheless entitled to indemnification and (iv) the indemnification does not
relate to any liability arising under Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or the rules or regulations
promulgated thereunder. With respect to any action brought by or in the right of
the Company, directors may also be indemnified, to the extent not prohibited by
applicable laws or as determined by a court of competent jurisdiction, against
expenses actually and reasonably incurred by them in connection with such action
if they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the Company.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has standing Audit and Compensation Committees. The
Audit Committee consists of Mr. Harris and Ms. Harrison. Among other functions,
the Audit Committee makes recommendations to the Board of Directors regarding
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by the Company's independent auditors, reviews
the Company's financial statements, and reviews and evaluates the Company's
internal control functions. The Compensation Committee consists of Messrs.
Harris and Lawrence Rosen and Ms. Harrison. The Compensation Committee
administers the Company's Stock Option Plans and equity compensation plans,
determines executive compensation and makes recommendations to the Board of
Directors concerning salaries and incentive compensation for employees and
consultants of the Company.
 
                                       45
48
 
COMPENSATION OF DIRECTORS
 
     Directors currently do not receive compensation for their service on the
Board of Directors or any committee thereof, although they are reimbursed for
expenses incurred in connection with their attendance at meetings of the Board
of Directors. On January 5, 1995, Mr. Diamond was granted options covering 1,666
shares having an exercise price of $1.95 per share, which was determined by the
Company to be fair market value at the time of grant, in consideration for his
services as a director of the Company. Such options were fully exercisable on
the date of grant. Directors are eligible to receive options under the Company's
1996 Stock Option Plan.
 
EXECUTIVE COMPENSATION
 
     The following table sets forth a summary of certain information regarding
compensation paid or accrued by the Company and New York N2K during 1995 to each
of the Company's and New York N2K's chief executive officer and each of the
other executive officers of the Company and New York N2K whose total annual
salary and bonus exceeded $100,000 during such period (collectively, the "Named
Executives"). The current positions of the Named Executives effective February
13, 1996 are also included in the table.
 
                           SUMMARY COMPENSATION TABLE
LONG-TERM
                                                                         COMPENSATION
                                                           ANNUAL        ------------
                                                        COMPENSATION      SECURITIES
                                                      ----------------    UNDERLYING     ALL OTHER
            NAME AND PRINCIPAL POSITION                SALARY    BONUS   OPTIONS/SARS   COMPENSATION
- ----------------------------------------------------  --------   -----   ------------   ------------
Lawrence L. Rosen(1)................................        --    --             --            --
  Chairman of the Board and Chief Executive Officer
  (effective February 13, 1996); Co-Chairman (1995,
  New York N2K)
Jonathan V. Diamond (2).............................        --    --             --            --
  Vice Chairman (effective February 13, 1996); Co-
  Chairman (1995, New York N2K)
James E. Coane......................................  $155,800    --         25,000        $2,272(3)
  President and Chief Operating Officer (effective
  February 13, 1996); President and Chief Executive
  Officer (1995)
Jeffrey Magill(4)...................................  $125,000    --         16,666(5)      2,178(3)
  Vice President -- Marketing
Bruce Johnson.......................................  $109,725    --         16,666         1,975(3)
  Vice President and Chief Financial Officer
- ---------------
 
(1) Mr. Rosen did not receive any compensation from New York N2K during fiscal
    year 1995. Effective with the Merger on February 13, 1996, Mr. Rosen entered
    into an employment agreement with the Company which provides for an annual
    base salary of $200,000 and a guaranteed bonus of $50,000 for fiscal year
    1996. See "-- Employment Agreements."
 
(2) Mr. Diamond did not receive any compensation from New York N2K during fiscal
    year 1995. Effective with the Merger on February 13, 1996, Mr. Diamond
    entered into an employment agreement with the Company which provides for an
    annual base salary of $200,000 and a guaranteed bonus of $50,000 for fiscal
    year 1996. See "-- Employment Agreements."
 
(3) Represents Company matching contributions under its 401(k) Matched Savings
    Plan.
 
(4) Mr. Magill's employment with the Company terminated on November 30, 1995.
 
(5) Mr. Magill's stock options were forfeited in connection with his termination
    of employment from the Company on November 30, 1995.
 
                                       46
49
 
     Option Grants in Fiscal 1995.  The following table summarizes certain
information with respect to Company stock options granted to the Named
Executives during the fiscal year ended December 31, 1995.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
                             ---------------------------------------------------
                                          PERCENT                                      POTENTIAL
                                            OF                                      REALIZABLE VALUE
                                           TOTAL                                       AT ASSUMED
                                          OPTIONS                                   ANNUAL RATES OF
                             NUMBER OF    GRANTED                                     STOCK PRICE
                             SECURITIES     TO                                      APPRECIATION FOR
                             UNDERLYING  EMPLOYEES  EXERCISE                         OPTION TERM(2)
                              OPTIONS    IN FISCAL    PRICE       EXPIRATION       ------------------
NAME                          GRANTED    YEAR 1995  PER SHARE        DATE            5%         10%
                             ----------  ---------  ---------  -----------------   -------    -------
Lawrence L. Rosen............       --       --          --    --                       --         --
Jonathan V. Diamond..........    1,666      0.6%      $1.95    January 5, 2005     $ 2,043    $ 5,178
James E. Coane...............   25,000      8.5%       2.40    August 10, 2005      37,733     95,625
Jeffrey Magill(3)............   16,666      7.5%       2.40    August 10, 2005      25,156     63,750
Bruce Johnson................   16,666      7.5%       2.40    August 10, 2005      25,156     63,750
- ---------------
 
(1) All stock options reported in this table were granted pursuant to the 1987
    Employee Stock Option Plan. The options vest ratably over a four-year period
    and have a ten-year term.
 
(2) This column shows the hypothetical gains or option spreads of the options
    granted based on assumed annual compound stock appreciation rates of 5% and
    10% over the full ten-year term of the options. The assumed rates of
    appreciation are mandated by the rules of the Securities and Exchange
    Commission and do not represent the Company's estimate or projection of
    future Common Stock prices.
 
(3) Mr. Magill's options were forfeited in connection with his termination of
    employment by the Company on November 30, 1995.
 
     Option Exercises in Fiscal 1995 and Fiscal Year-End Values.  The following
table shows the number of shares covered by both exercisable and non-exercisable
stock options as of fiscal year-end, and the values for unexercised options. No
Named Executive exercised any Company stock options during 1995.
 
   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
                                     VALUES
NUMBER OF SECURITIES                VALUE OF UNEXERCISED
                                        UNDERLYING UNEXERCISED             IN-THE-MONEY OPTIONS AT
                                     OPTIONS AT DECEMBER 31, 1995            DECEMBER 31, 1995(1)
                                    ------------------------------      ------------------------------
               NAME                 EXERCISABLE     UNEXERCISABLE       EXERCISABLE     UNEXERCISABLE
- ----------------------------------- ------------    --------------      ------------    --------------
Lawrence L. Rosen..................         --               --                --               --
Jonathan V. Diamond................      1,666               --            $  750               --
James E. Coane.....................    158,649           40,933             2,429           $5,625
Jeffrey Magill(2)..................     30,833               --             1,875               --
Bruce Johnson......................     54,954           30,833             2,288            5,625
- ---------------
 
(1) Based on the difference between the fair market value of the Common Stock on
    December 31, 1995 ($2.40), and the option exercise price for each
    above-stated option. The above valuation may not reflect the actual value of
    unexercised options as the value of unexercised options will fluctuate with
    market activity.
(2) Mr. Magill's options were forfeited in connection with his termination of
    employment by the Company on November 30, 1995.
 
     Option Grants in 1996.  On February 13, 1996, options covering 1,100,264
shares having an exercise price at or above $2.40 per share, which was
determined by the Company to be fair market value at the time of grant, were
granted to employees of the Company, including Messrs. L. Rosen, Diamond,
Grusin, Coane and Johnson who were granted options covering 293,699, 293,699,
293,699, 41,666 and 16,666 shares, respectively. Such options vest ratably over
a four-year period and generally have a ten-year term.
 
                                       47
50
 
EMPLOYMENT AGREEMENTS
 
     On February 13, 1996, the Company entered into employment agreements with
Lawrence L. Rosen, Jonathan V. Diamond and Robert David Grusin (the "Rosen
Employment Agreement," the "Diamond Employment Agreement" and the "Grusin
Employment Agreement", respectively) to provide for service in the capacities of
Chairman and Chief Executive Officer, Vice Chairman and Vice Chairman, and base
salaries of $200,000, $200,000 and $100,000, respectively, which salaries may be
increased as determined by the Compensation Committee of the Board of Directors.
Each of the Rosen Employment Agreement and the Diamond Employment Agreement
provides for payment of an annual bonus of not less than $50,000, until such
time as such executive's base salary is at least $250,000. The Grusin Employment
Agreement provides for an annual bonus in an amount to be determined by the
Board of Directors. In connection with the Rosen Employment Agreement, Diamond
Employment Agreement and Grusin Employment Agreement, the Company also agreed to
grant incentive stock options to each of the executives to purchase 166,666
shares of Common Stock and additional non-qualified options to purchase 127,033
shares of Common Stock at an exercise price of $2.40 per share (or such higher
exercise price as may be required under Section 422 of the Internal Revenue
Code), which vest ratably over a four-year period.
 
     Each of the Rosen Employment Agreement, Diamond Employment Agreement and
Grusin Employment Agreement is for a two-year term, but absent notice of
termination by either the Company or the executive, shall be automatically
renewed for consecutive one-year periods. If the Company terminates an
executive's employment other than for "cause" or due to "disability" or there
occurs a "change in control" (each as defined in the Rosen Employment Agreement,
the Diamond Employment Agreement and the Grusin Employment Agreement), each
executive will generally be entitled to (i) eighteen months severance, (ii) an
amount equal to his average annual bonus over the prior three years (or if
employed for less than three years, such average multiplied by 1.5) paid out
over 18 months, and (iii) the immediate vesting of any unexercised stock
options. In accordance with the Rosen Employment Agreement, Diamond Employment
Agreement and Grusin Employment Agreement, each executive has agreed not to
disclose any of the Company's confidential information and not to compete with
the Company for an eighteen-month period following termination of his term of
employment with the Company.
 
     On May 1, 1987, the Company entered into an employment agreement with Mr.
Coane (as amended, the "Coane Employment Agreement") that provides for a base
salary of $115,000 until September 30, 1987, and a base salary of $125,000
thereafter, subject to salary increases or other compensation at the discretion
of the Board of Directors. The Company also agreed to grant an option to Mr.
Coane to purchase 133,333 shares of Common Stock of the Company at an exercise
price of $3.00 per share, exercisable until May 1, 1997. Pursuant to the terms
of the Coane Employment Agreement, the executive agreed to serve as President
and Chief Executive Officer, pursuant to election or appointment to those
positions, and to perform such other duties as shall be assigned to him during
the continuance of such agreement. The Coane Employment Agreement was for an
initial term of three years, but absent notice of termination by either the
Company or the executive, the agreement shall be automatically renewed for
consecutive one-year periods. If the Company terminates the executive's
employment other than for "cause" or due to "disability" or there occurs a
"change in control" (each as defined in the Coane Employment Agreement), the
executive shall be entitled to severance for eighteen months. In accordance with
the Coane Employment Agreement, the executive has agreed not to compete with the
Company during the term of his employment or for any period during which he
receives severance pay or acts, pursuant to the agreement, as a consultant to
the Company.
 
     On February 8, 1988, the Company entered into an employment agreement with
Bruce Johnson (the "Johnson Employment Agreement") that provides for a base
salary of $75,000, participation in a bonus plan and salary increases or other
compensation at the discretion of the Board of Directors. The Company also
agreed to grant an option to Bruce Johnson to purchase 41,666 shares of Common
Stock of the Company at an exercise price of $3.75 per share, exercisable until
February 8, 1998. Pursuant to the terms of the Johnson Employment Agreement, the
executive agreed to serve as Vice President and Chief Financial Officer,
pursuant to election or appointment to those positions, and to perform such
other duties as shall be assigned to him during the continuance of such
agreement. The Johnson Employment Agreement was for an initial term of three
years, but absent notice of termination by either the Company or the executive,
the agreement shall be automatically renewed for consecutive one-year periods.
If the Company terminates the executive's employment other than for "cause" or
due to "disability," or there occurs a "change in control" (each as defined in
the Johnson Employment Agreement), the executive shall be entitled to severance
for twelve
 
                                       48
51
 
months. In accordance with the terms of the Johnson Employment Agreement, the
executive has agreed not to compete with the Company during the term of his
employment or for any period during which he receives severance pay or acts,
pursuant to the agreement, as a consultant to the Company.
 
STOCK PLANS
 
     The Company has historically utilized stock option plans as an integral
component of its compensation program for directors, officers and key executive
employees of the Company. The Company believes that stock options provide
long-term incentives to such persons and encourage the ownership of the
Company's Common Stock.
 
     1987 Employee Incentive Stock Option Plan.  The Company's 1987 Employee
Incentive Stock Option Plan (the "1987 Option Plan") provided for the grant of
stock options to certain officers and key executive employees of the Company.
The options granted under the 1987 Option Plan were intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code. As of
May 31, 1996, a total of 650,833 options for Common Stock were outstanding under
the 1987 Option Plan. Any shares of Common Stock subject to an option that has
not been exercised shall remain outstanding until such option is exercised or
expires in accordance with its terms and the terms of the 1987 Option Plan.
Generally, options granted under the 1987 Option Plan vest ratably over a
four-year period on each anniversary of the date of grant. No further stock
options will be granted under the 1987 Option Plan.
 
     Under the 1987 Option Plan, options are not assignable or transferable
except by will or under the laws of descent and distribution. In the event of an
offer to acquire all or substantially all of the assets or stock of the Company,
all options granted under the 1987 Option Plan shall automatically become
immediately exercisable without regard to the provisions relating to installment
exercises or vesting periods.
 
     1996 Stock Option Plan.  The 1996 Option Plan was adopted in February 1996.
In June 1996, the Board of Directors of the Company adopted, subject to
stockholder approval, the Company's Amended and Restated 1996 Stock Option Plan
(the "1996 Option Plan"). The 1987 Option Plan and the 1996 Option Plan are
collectively referred to as the "Stock Option Plans." Under the 1996 Option
Plan, stock options may be granted to directors, executives and other key
employees of the Company and its subsidiaries. All options granted under the
1996 Option Plan are not assignable or transferable except by will or under the
laws of descent and distribution. As of May 31, 1996, a total of 1,128,598
options for Common Stock were outstanding under the 1996 Option Plan.
 
     The 1996 Option Plan is administered by the Compensation Committee of the
Board of Directors or such other committee as may be appointed by the Board.
Subject to the limitations set forth in the 1996 Option Plan, the Compensation
Committee has the sole and complete authority to select participants, grant
options to participants, impose restrictions and conditions upon each option,
modify or amend the terms of each outstanding option, reduce the exercise price
per share of unexercised options, accelerate or defer the exercise price per
share of any outstanding option and make all other determinations and take all
other actions necessary for the administration of the plan. The Compensation
Committee may amend or modify the terms of any option agreement in any manner to
the extent that it would have had the authority initially to grant an option
with such amended terms; provided that no such amendment or modification shall
impair the rights of any participant under any outstanding option without the
consent of such participant.
 
     Options granted under the 1996 Option Plan may be either incentive stock
options which are intended to satisfy the requirements of Section 422 of the
Internal Revenue Code, or options that do not qualify as incentive stock
options. Generally, options granted under the 1996 Option Plan vest ratably over
a four-year period on each anniversary of the date of grant. At the Compensation
Committee's discretion, however, options may be made exercisable at any other
time or upon the occurrence of certain events or the achievement of certain
conditions or performance goals. Options granted under the 1996 Option Plan are
exercisable for a period not to exceed ten years from the date of grant, except
that upon a participant's termination of employment for any reason, all vested
options shall expire 90 days following such termination date and any nonvested
options shall be immediately forfeited. Pursuant to the terms of the 1996 Option
Plan, the exercise price of all incentive stock options and nonqualified stock
options granted under the Plan shall not be less than the fair market value of
the Common Stock at the time of grant. In the event of a "change of control" of
the Company (as defined in the 1996 Option Plan) or the termination of a
participant's
 
                                       49
52
 
employment other than for cause, death, disability or voluntary departure, the
Compensation Committee may provide that stock options previously granted shall
be immediately exercisable.
 
     The Company has authorized and reserved 2,200,000 shares of Common Stock
for issuance under the 1996 Option Plan. The shares may be unissued shares or
treasury shares. If any options that are the subject of an award are not
exercised prior to their expiration or are cancelled, terminated or forfeited
without the issuance of Common Stock thereunder, such shares will no longer be
charged against such maximum share limitation and may again be made subject to
award under the 1996 Option Plan. In the event of certain corporate
reorganizations, recapitalizations or other specified corporate transactions
affecting the Common Stock of the Company, proportionate adjustments may be made
to the number of shares available for grant and to the number of shares and
price of outstanding awards made before the event. The 1996 Option Plan has a
term of ten years, subject to earlier termination or amendment by the Board of
Directors. All awards granted under the 1996 Option Plan prior to its
termination remain outstanding until exercised, paid or terminated in accordance
with their terms. The Board of Directors may amend the 1996 Option Plan at any
time, except that shareholder approval is required for certain amendments to the
extent it is required by law, agreement or the rules of any exchange upon which
the Common Stock is listed.
 
     The grant of a stock option under the 1996 Option Plan will not generally
result in taxable income for the participant, nor in a deductible compensation
expense for the Company, at the time of grant. The participant will have no
taxable income upon exercising an incentive stock option (except that the
alternative minimum tax may apply), and the Company will receive no deduction
when an incentive stock option is exercised. Upon exercising a nonqualified
stock option, the participant will recognize ordinary income in the amount by
which the fair market value of the Common Stock on the date of exercise exceeds
the exercise price, and the Company will generally be entitled to a
corresponding deduction. The treatment of a participant's disposition of shares
of Common Stock acquired upon the exercise of an option is dependent upon the
length of time the shares have been held and on whether such shares were
acquired by exercising an incentive stock option or a nonqualified stock option.
Generally, there will be no tax consequence to the Company in connection with
the disposition of shares acquired under an option except that the Company may
be entitled to a deduction in the case of a disposition of shares acquired upon
exercise of an incentive stock option before the applicable incentive stock
option holding period has been satisfied.
 
     Stock options previously granted under the 1996 Option Plan to executive
officers and directors are described above under "-- Executive Compensation --
Option Grants in 1996." The number of shares of Common Stock that may be subject
to options granted in the future to executive officers and other officers, key
employees and directors of the Company under the 1996 Option Plan is not
determinable at this time.
 
     1996 Employee Stock Purchase Plan.  In June 1996, the Board of Directors of
the Company adopted and the stockholders of the Company approved the Company's
1996 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan is
intended to satisfy the requirements of Section 423 of the Internal Revenue
Code. The Purchase Plan is administered by the Compensation Committee. Any
employee of the Company or any subsidiary designated by the Compensation
Committee who customarily works at least 20 hours per week and five months per
year is eligible to participate in the Purchase Plan after having worked for the
Company for six months. Approximately 98 employees currently are eligible to
participate in the Purchase Plan. Non-employee directors of the Company are not
eligible to participate in the Purchase Plan. Each employee eligible to
participate in the Purchase Plan will be granted an option to contribute between
one and ten percent of the employee's compensation towards the purchase of the
Company's Common Stock at a purchase price for each three-month purchase period
(a "Purchase Period") equal to the lower of (x) 85% of the fair market value of
a share of the Company's Common Stock on the first day of the Purchase Period
and (y) 85% of the fair market value of a share of the Company's Common Stock on
the last day of the Purchase Period. The amount to be contributed by a
participant will be deducted from each paycheck, held for the participant during
a Purchase Period and applied towards the purchase of the Company's Common Stock
on the last day of the Purchase Period. A participant may change the percentage
of his or her compensation to be contributed for any given purchase period prior
to the beginning of that period and may elect not to participate with respect to
one or more plan periods, but then must wait until the next calendar year before
participating again. The number of shares available for purchase under the
Purchase Plan is 1,500,000. The Board at any time may amend, suspend or
discontinue the Purchase Plan, in whole or in part.
 
                                       50
53
 
                              CERTAIN TRANSACTIONS
 
SERIES D PREFERRED STOCK PURCHASE
 
     In August and September 1994, Lawrence L. Rosen and Jonathan V. Diamond and
entities affiliated with Robert C. Harris, Jr. and Susanne Harrison, directors
of the Company, purchased an aggregate of 725,000 shares of Series D Preferred
Stock which will convert upon consummation of the Offering into 743,590 shares
of Common Stock. The purchase price per share of Common Stock on an as-converted
basis was $1.95. Each of these individuals (and/or their affiliated entities)
purchased shares of Series D Preferred Stock that convert into the number of
shares of Common Stock set forth immediately following his or her name: Lawrence
L. Rosen (25,641); Jonathan V. Diamond (51,282); Robert C. Harris, Jr.
(512,821); and Susanne Harrison (153,846).
 
CONSIDERATION FOR THE MERGER; SERIES E PREFERRED STOCK
 
     In February 1996, as consideration for all of the outstanding shares of
common stock of New York N2K in the Merger, the shareholders of New York N2K
received an aggregate of 1,797,146 shares of Common Stock and 1,347,860 shares
of Series E Preferred Stock of the Company. The stockholders of New York N2K at
the time of the Merger included Lawrence L. Rosen, Jonathan V. Diamond, Robert
David Grusin and Jerold L. Rosen. Each of these individuals received the number
of shares of Common Stock and Series E Preferred Stock that will, upon
conversion of the Series E Preferred Stock, result in the number of shares of
Common Stock set forth immediately following his or her name: Lawrence L. Rosen
(521,172), (130,293); Jonathan V. Diamond (521,172), (130,293); Robert David
Grusin (521,172), (130,293); and Jerold L. Rosen (143,771), (35,943). See
"Principal Stockholders." Also in February 1996, entities affiliated with Robert
C. Harris, Jr. and Susanne Harrison, directors of the Company, and Messrs.
Diamond, Grusin, L. Rosen and J. Rosen purchased an aggregate of 3,050,000
shares of Series E Preferred Stock at a purchase price of $.80 per share. Each
of these individuals (and/or their affiliated entities) purchased the number of
shares of Series E Preferred Stock that convert into the number of shares of
Common Stock set forth immediately following his or her name: Robert C. Harris,
Jr. (172,917); Susanne Harrison (166,667); Lawrence L. Rosen (218,750); Jonathan
V. Diamond (239,583); Robert David Grusin (208,333); and Jerold Rosen (10,416).
In May 1996, Mr. Harris purchased an additional 125,000 shares of Series E
Preferred Stock, which will convert into 41,666 shares of Common Stock. The
purchase price per share of Common Stock on an as-converted basis was $2.40.
 
OPTION GRANTS TO INSIDERS
 
     The Company has granted options to purchase shares of Common Stock to
certain of its executive officers and directors. See "Management--Employment
Agreements," "-- Compensation of Directors," and "Executive
Compensation -- Option Grants in 1996."
 
PREFERRED STOCK CONVERSION
 
     Upon consummation of the Offering, 488,838 shares of the Company's Series A
Preferred Stock, par value $.001 per share (the "Series A Stock"), will convert
into 228,369 shares of Common Stock; 625,000 shares of Series B Preferred Stock,
par value $.001 per share (the "Series B Stock"), will convert into 238,095
shares of Common Stock; 2,142,857 shares of Series C Preferred Stock, par value
$.001 per share (the "Series C Stock"), will convert into 800,000 shares of
Common Stock; 800,000 shares of Series D Preferred Stock, par value $.001 per
share (the "Series D Stock"), will convert into 820,513 shares of Common Stock;
6,007,060 shares of Series E Preferred Stock, par value $.001 per share (the
"Series E Stock"), will convert into 2,002,354 shares of Common Stock; and
5,333,333 shares of Series F Preferred Stock, par value $.001 per share (the
"Series F Stock"), will convert into 1,777,777 shares of Common Stock (the
Series A Stock, the Series B Stock, the Series C Stock, the Series D Stock, the
Series E Stock and the Series F Stock are referred to collectively as the
"Preferred Stock"). The automatic conversion of the Preferred Stock is referred
to herein as the "Preferred Stock Conversion." See "Principal Stockholders."
 
                                       51
54
 
EMPLOYMENT AGREEMENTS
 
     The Company has entered into employment agreements with certain of its
executive officers as described under "Management -- Employment Agreements."
 
INDEMNITY AGREEMENTS
 
     Simultaneously with the completion of the Merger, the stockholders of New
York N2K, including Lawrence L. Rosen, Jonathan V. Diamond, Robert David Grusin
and Jerold R. Rosen (collectively, the "New York N2K Stockholders"), entered
into an indemnification agreement with the Company (the "Indemnification
Agreement"). The Indemnification Agreement provides for indemnification by the
New York N2K Stockholders and by the Company against certain liabilities,
losses, claims, damages or expenses arising from or in connection with (i) the
breach of any warranty, the misstatement of any representation or the failure to
fulfill any covenant or agreement made by New York N2K in the Merger Agreement
dated as of January 31, 1996 (the "Merger Agreement" ) between Old N2K and New
York N2K, or in any document furnished by New York N2K or any representative
thereof in connection with the Merger Agreement or the transactions contemplated
therein; (ii) any and all claims, suits, actions or proceedings for brokerage or
other commissions in connection with the Merger Agreement or the transactions
contemplated thereby; and (iii) any and all actions, suits, proceedings, claims,
demands, assessments, judgments, costs and expenses incident to any of the
foregoing. Pursuant to the Indemnification Agreement, all indemnification by the
New York N2K Stockholders shall be effected solely by return to the Company of
all or a portion of an aggregate of 416,666 escrowed shares of Common Stock at a
value of $2.40 per share and all indemnification by the Company shall be
effected by the issuance by the Company to the applicable New York N2K
Stockholders of up to an aggregate of 416,666 shares of Common Stock at a value
of $2.40 per share, in proportion to each New York N2K Stockholder's ownership
interest in the Company at the time of the Merger. The Indemnification Agreement
will terminate upon the consummation of the Offering.
 
     Upon the completion of the Offering, the Company will enter into
Indemnification Agreements with each of its directors and executive officers
whereby the Company will agree, subject to certain limitations, to indemnify and
hold harmless each director and executive officer from liabilities incurred as a
result of such person's status as a director of the Company. See
"Management -- Limitations on Directors' Liability -- Indemnification
Agreements."
 
FUTURE INTERESTED TRANSACTIONS
 
     The Board of Directors has adopted a policy, which will be effective
simultaneously with the completion of the Offering, to provide that future
transactions between the Company and its officers, directors and other
affiliates must (i) be approved by a majority of the members of the Board of
Directors and by a majority of the disinterested members of the Board of
Directors, (ii) be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and (iii) be for bona fide business
purposes only.
 
                                       52
55
 
                             PRINCIPAL STOCKHOLDERS
 
     The table below sets forth at June 21, 1996, certain information prior to
and after the Offering regarding beneficial ownership of Common Stock held by
(i) each director and each of the Named Executives who own shares of Common
Stock, (ii) all directors and executive officers of the Company as a group and
(iii) each person known by the Company to own beneficially more than 5% of the
Common Stock. Each individual or entity named has sole investment and voting
power with respect to shares of Common Stock beneficially owned by them, except
where otherwise noted.
PERCENTAGE BENEFICIALLY
                                                                               OWNED(1)
                                                        SHARES        ---------------------------
                                                       BENEFICIALLY   BEFORE THE       AFTER THE
                                                         OWNED         OFFERING         OFFERING
                                                       ---------      -----------      ----------
EXECUTIVE OFFICERS AND DIRECTORS:
Jonathan V. Diamond(2)................................   995,173          10.1
Lawrence L. Rosen(3)..................................   885,439           9.0
Robert David Grusin...................................   859,798           8.8
Susanne Harrison(4)...................................   780,757           7.9
Robert C. Harris, Jr.(5)..............................   744,070           7.6
Jerold Rosen..........................................   190,131           1.9
James E. Coane(6).....................................   186,383           1.9
Daniel E. Meyer.......................................   137,472           1.4
Bruce Johnson(7)......................................    67,654             *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (9
  PERSONS):........................................... 4,846,877          49.3
OTHER PRINCIPAL STOCKHOLDERS:
Poly Ventures II, Limited Partnership(4)..............   779,090           7.9
     901 Route 110
     Farmingdale, NY 11735
Unterberg Harris Interactive Media
  Limited Partnership, CV(5)..........................   664,904           6.8
     Swiss Bank Tower
     10 East 50th Street, 22nd Floor
     New York, NY 10022
- ---------------
* Indicates beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
 
(1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule
    13d-3(d), shares not outstanding which are subject to options, warrants,
    rights or conversion privileges exercisable within 60 days are deemed
    outstanding for the purpose of calculating the number and percentage owned
    by such person, but not deemed outstanding for the purpose of calculating
    the percentage owned by any other person listed. As of June 21, 1996, the
    Company had 9,821,711 shares of Common Stock outstanding.
 
(2) Represents 993,507 shares of Common Stock and exercisable options to
    purchase 1,666 shares of Common Stock.
 
(3) Represents 635,439 shares of Common Stock and 250,000 shares of Common Stock
    held by the Lawrence L. Rosen Family Trust, with respect to which Mr. Rosen
    has voting power.
 
(4) Represents exercisable options for 1,666 shares of Common Stock and 779,090
    shares of Common Stock owned by Poly Ventures II, Limited Partnership of
    which Ms. Harrison is a general partner. Ms. Harrison disclaims beneficial
    ownership of shares owned by Poly Ventures II, Limited Partnership .
 
(5) Represents 79,166 shares of Common Stock and 664,904 shares of Common Stock
    held by Unterberg Harris Interactive Media Limited Partnership, CV. Mr.
    Harris is a Managing Director of Unterberg Harris. Mr. Harris disclaims
    beneficial ownership of shares owned by Unterberg Harris Interactive Media
    Limited Partnership, CV.
 
(6) Represents 27,733 shares of Common Stock and exercisable options to purchase
    158,649 shares of Common Stock.
 
(7) Represents 12,700 shares of Common Stock and an exercisable option to
    purchase 54,954 shares of Common Stock.
 
                                       53
56
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The following summarizes certain provisions of the Certificate of
Incorporation and Bylaws. Such summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Certificate of Incorporation and the Bylaws, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
 
GENERAL
 
     Effective upon the closing of the Offering, the authorized capital stock of
the Company will be comprised of 100,000,000 shares of Common Stock and
20,000,000 shares of Preferred Stock.
 
COMMON STOCK
 
     Following the Offering, 12,421,711 shares of Common Stock will be
outstanding. All of the issued and outstanding shares of Common Stock are, and
upon the completion of the Offering the shares of Common Stock offered hereby
will be, fully paid and non-assessable. Each holder of shares of Common Stock is
entitled to one vote per share on all matters to be voted on by stockholders
generally, including the election of directors. There are no cumulative voting
rights. The holders of Common Stock are entitled to dividends and other
distributions as may be declared from time to time by the Board of Directors out
of funds legally available therefor, if any. See "Dividend Policy." Upon the
liquidation, dissolution or winding up of the Company, the holders of shares of
Common Stock would be entitled to share ratably in the distribution of all of
the Company's assets remaining available for distribution after satisfaction of
all its liabilities and the payment of the liquidation preference of any
outstanding Preferred Stock as described below. The holders of Common Stock have
no preemptive or other subscription rights to purchase shares of stock of the
Company, nor are such holders entitled to the benefits of any redemption or
sinking fund provisions. As of June 21, 1996, there were approximately 220
beneficial owners of Common Stock.
 
PREFERRED STOCK
 
     The Certificate of Incorporation authorizes the Board of Directors to
create and issue one or more series of Preferred Stock and determine the rights
and preferences of each series, to the extent permitted by the Certificate of
Incorporation and applicable law. Among other rights, the Board of Directors may
determine, without the further vote or action by the Company's stockholders, (i)
the number of shares constituting the series and the distinctive designation of
the series; (b) the dividend rate on the shares of the series, whether dividends
will be cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series; (iii)
whether the series shall have voting rights, in addition to the voting rights
provided by law and, if so, the terms of such voting rights; (iv) whether the
series shall have conversion privileges, and, if so, the terms and conditions of
such conversion, including provision for adjustment of the conversion rate in
such events as the Board of Directors shall determine; (v) whether or not the
shares of that series shall be redeemable or exchangeable, and, if so, the terms
and conditions of such redemption or exchange, as the case may be, including the
date or dates upon or after which they shall be redeemable or exchangeable, as
the case may be, and the amount per share payable in case of redemption, which
amount may vary under different conditions and at different redemption dates;
(vi) whether the series shall have a sinking fund, for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund and (vii) the rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the Company
and the relative rights or priority, if any, of payment of shares of the series.
Except for any difference so provided by the Board of Directors, the shares of
all series of Preferred Stock will rank on a parity with respect to the payment
of dividends and to the distribution of assets upon liquidation. Although the
Company has no present plans to issue any shares of Preferred Stock following
the consummation of the Offering, the issuance of shares of Preferred Stock, or
the issuance of rights to purchase such shares, may have the effect of delaying,
deferring or preventing a change of control of the Company or an unsolicited
acquisition proposal. See "Risk Factors -- Anti-Takeover Provisions."
 
                                       54
57
 
REGISTRATION RIGHTS
 
     The holders of an aggregate of 5,688,735 shares of the Common Stock to be
outstanding upon the consummation of the Offering (collectively, the
"Registration Rights Holders") have been granted by the Company certain demand
and incidental registration rights. In general, the Registration Rights Holders
have the right at any time after 180 days from the effective date of the
Registration Statement of which this Prospectus forms a part until the time that
the Company shall have qualified for the use of Form S-2 or S-3, on one
occasion, to cause the Company to register their holdings of Common Stock under
the Securities Act (such right being referred to as a "demand registration
right"). The Registration Rights Holders are also entitled, if the Company
determines to file a registration statement covering any of its securities under
the Securities Act (with the exception of an offering pursuant to a registration
statement on Form S-8 or S-4 and, in the case of Registration Rights Holders
holding the Series F Stock, an initial public offering by the Company) to
require the Company to use its best efforts to include a requested amount of
their shares of Common Stock in the Company's registered offering (such right
being referred to as an "incidental registration right"), subject to reduction
if the managing underwriter for the offering determines that the inclusion of
such shares would interfere with the successful marketing of the offering.
Furthermore, at such time as the Company shall have qualified for the use of
Form S-2 or S-3, the Registration Rights Holders, and their permitted
transferees, have the right to make one demand registration request annually,
subject to certain marketing restrictions.
 
     The Company is required to bear all registration expenses (other than
underwriting discounts and commissions and fees, and certain fees and
disbursements of counsel of the Registration Rights Holders) and has agreed to
indemnify the Registration Rights Holders against, and provide contribution with
respect to, certain liabilities under the Securities Act in connection with
incidental and demand registrations. The Registration Rights Holders have agreed
not to exercise their demand registration rights for a period of 180 days after
the date of this Prospectus. The Company is seeking the consent of the
Registration Rights Holders to delay the effectiveness of any demand
registration statement until the expiration of the 270-day period after the date
of this Prospectus, to the extent requested by the Representatives.
 
WARRANT AND OPTION ISSUANCES
 
     As of June 21, 1996, there were warrants outstanding to purchase an
aggregate of 135,555 shares of Common Stock at an average exercise price of
$6.57 per share, expiring at various dates ending on June 10, 2003, and options
to purchase an aggregate of 1,880,952 shares of Common Stock at an average
exercise price of $2.47 per share, expiring at various dates ending on April 1,
2006.
 
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
 
     Section 203 of the Delaware GCL contains certain provisions that may make
more difficult the acquisition of control of the Company by means of a tender
offer, open market purchase, a proxy fight or otherwise. These provisions are
designed to encourage persons seeking to acquire control of the Company to
negotiate with the Board of Directors. However, these provisions could have the
effect of discouraging a prospective acquiror from making a tender offer or
otherwise attempting to obtain control of the Company. To the extent that these
provisions discourage takeover attempts, they could deprive stockholders of
opportunities to realize takeover premiums for their shares or could depress the
market price of the Common Stock.
 
     Set forth below is a description of the relevant provisions of Section 203
of the Delaware GCL. The description is intended as a summary only and is
qualified in its entirety by reference to Section 203 of the Delaware GCL.
 
     Section 203 of the Delaware GCL (the "Delaware Statute") prohibits certain
"business combination" transactions between a publicly held Delaware
corporation, such as the Company after this offering, and any "interested
stockholder" for a period of three years after the date on which the latter
became an interested stockholder, unless (i) prior to that date either the
proposed business combination or the proposed acquisition of stock resulting in
its becoming an interested stockholder is approved by the Board of Directors,
(ii) in the same transaction in which it becomes an interested stockholder, the
interested stockholder acquires at least
 
                                       55
58
 
85% of those shares of the voting stock of the corporation which are not held by
the directors, officers or certain employee stock plans or (iii) the business
combination with the interested stockholder is approved by the Board of
Directors and also approved at a stockholders' meeting by the affirmative vote
of the holders of at least two-thirds of the outstanding shares of the
corporation's voting stock other than shares held by the interested stockholder.
 
NASDAQ NATIONAL MARKET LISTING
 
     The Company intends to apply for listing of the Common Stock on the Nasdaq
National Market under the trading symbol "NTKI."
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the Common Stock is
                              .
 
                                       56
59
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Immediately following the Offering, there will be 12,421,711 shares of
Common Stock issued and outstanding (assuming the Underwriters' over-allotment
option is not exercised). Of such shares, the 2,600,000 shares of Common Stock
to be sold in the Offering will be immediately eligible for sale in the public
market, except for any of such shares owned at any time by an "affiliate" of the
Company within the meaning of Rule 144 under the Securities Act. The remaining
9,761,989 issued and outstanding shares are "restricted securities" within the
meaning of Rule 144 and may not be publicly resold, except in compliance with
the registration requirements of the Securities Act or pursuant to an exemption
from registration, including that provided by Rule 144.
 
     In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least two years, including persons who may be deemed affiliates of the
Company, is entitled to sell within any three-month period a number of shares of
Common Stock that does not exceed the greater of 1% of the then-outstanding
shares of Common Stock of the Company, or the average weekly trading volume of
Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are subject to certain restrictions relating to manner of
sale, notice and the availability of current public information about the
Company. A person who is not an "affiliate" of the Company at any time during
the 90 days preceding a sale, and who has beneficially owned shares for at least
three years, would be entitled to sell such shares immediately following the
Offering under Rule 144(k) without regard to the volume limitations, manner of
sale provisions or notice or other requirements of Rule 144. In addition, any
employee, director or officer of, or consultant to, the Company who purchased
his shares pursuant to a written compensatory plan or contract may be entitled
to rely on the resale provisions of Rule 701, which permits non-affiliates to
sell their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144, and permits
affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus.
 
     The directors and executive officers of the Company and certain other
stockholders of the Company, who collectively hold        of the outstanding
shares of Common Stock, have agreed not to, directly or indirectly, offer, sell,
assign, transfer, encumber, pledge, contract to sell, grant an option to
purchase or otherwise dispose of any Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of Cowen &
Company. Certain stockholders of the Company are entitled to both demand and
incidental registration rights with respect to 5,629,013 shares of Common Stock.
The Company is seeking the consent of the Registration Rights Holders, who
possess demand registration rights at any time 180 days after the date of this
Prospectus, to delay the effectiveness of any demand registration statement
until the expiration of the 270-day period after the date of this Prospectus, to
the extent requested by the Representatives. After the expiration of the 180-day
period (or 270-day period, as applicable), such holders may choose to exercise
their demand registration rights, which could result in a large number of shares
being sold in the public market. See "Description of Capital
Stock -- Registration Rights" and "Underwriting."
 
     The Company intends to file immediately following the Offering registration
statements on Form S-8 under the Securities Act to register an aggregate of
2,952,354 shares of Common Stock reserved for issuance pursuant to the exercise
of stock options granted under the Stock Option Plans and 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Purchase Plan. The stock
registered under such registration statements will thereafter be available for
sale in the public market upon vesting of such options, subject to the resale
limitations of Rule 144 applicable to "affiliates" of the Company. See
"Management -- Stock Plans."
 
     Prior to the date of this Prospectus, there has been no public market for
the Common Stock. Trading of the Common Stock on the Nasdaq National Market is
expected to commence following the completion of the Offering. No prediction can
be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. See "Risk
Factors -- Share Eligible for Future Sale; Registration Rights."
 
                                       57
60
 
                                  UNDERWRITING
 
     Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Cowen & Company,
Oppenheimer & Co., Inc. and Unterberg Harris are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of Shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
NUMBER OF
                                                                         SHARES OF
                                UNDERWRITER                            COMMON STOCK
        ------------------------------------------------------------   -------------
Cowen & Company.............................................
        Oppenheimer & Co., Inc......................................
        Unterberg Harris............................................
 
                                                                       -------------
                  Total.............................................
                                                                       ==============
The Underwriters propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less a
concession of $               per share. The Underwriters may allow, and such
dealers may allow a concession not in excess of $          per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Representatives. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any are taken.
 
     The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 390,000
additional shares at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
above table bears to 2,600,000 and the Company will be obligated, pursuant to
the option, to sell such shares to the Underwriters. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby. If purchased, the Underwriters will offer
such additional shares on the same terms as those on which the shares are being
offered.
 
     The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
 
     The officers, directors and certain stockholders of the Company, holding in
the aggregate           shares of the outstanding Common Stock, have agreed not
to, directly or indirectly, offer, sell, contract to sell, assign,
 
                                       58
61
 
transfer, encumber, pledge, contract to sell, grant an option to purchase or
otherwise dispose of any Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of Cowen & Company. The
Company has also agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or any rights to acquire Common
Stock (other than the grant of options pursuant to the Company's 1996 Stock
Option Plan and shares issuable upon exercise of outstanding options and
warrants) for a period of 180 days after the date of this Prospectus, without
the prior written consent of Cowen & Company, subject to certain limited
exceptions. See "Shares Eligible for Future Sale."
 
     The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
 
     Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations are prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and stages of development
of other companies which the Company and the Representatives of the Underwriters
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors,
if any, deemed relevant.
 
     Affiliates of Unterberg Harris are stockholders of the Company and Robert
C. Harris, Jr., a co-founder and a Managing Director of Unterberg Harris, is a
director and stockholder of the Company. See "Management", "Certain
Transactions" and "Principal Stockholders." Unterberg Harris acted as financial
advisor to Telebase in connection with the Merger, for which it received a
warrant to purchase 50,000 shares of Common Stock at an exercise price of $2.40
per share as compensation.
 
                                 LEGAL MATTERS
 
     Certain legal matters with respect to the legality of the Common Stock
offered hereby will be passed upon for the Company by Dewey Ballantine, 1301
Avenue of the Americas, New York, New York 10019. O'Sullivan Graev & Karabell,
LLP, 30 Rockefeller Plaza, New York, New York 10112, has acted as counsel for
the Underwriters in connection with the Offering.
 
                                    EXPERTS
 
     The audited consolidated financial statements of the Company as of December
31, 1994 and 1995 and March 31, 1996, and for each of the years in the
three-year period ended December 31, 1995, and the three months ended March 31,
1996, included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report. The
audited financial statements of N2K Inc., a New York corporation, as of December
31, 1995 included in this Registration Statement have been audited by Richard A.
Eisner & Company, LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
 
                                       59
62
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to the
shares of Common Stock offered hereby. For the purposes hereof, the term
"Registration Statement" means the original Registration Statementand any and
all amendments thereto. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and such Common Stock,
reference is hereby made to such Registration Statement, which can be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Regional Offices of the Commission at Seven World Trade Center, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material also can be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed
rates.
 
     Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
 
     The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing updated summary financial information for each of
the first three quarters of each fiscal year.
 
                                       60
63
 
                            N2K INC. AND SUBSIDIARY
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
                                                                                       -----
FINANCIAL STATEMENTS OF N2K INC. AND SUBSIDIARY
Report of Independent Public Accountants.............................................  F-2
Consolidated Balance Sheets..........................................................  F-3
Consolidated Statements of Operations................................................  F-4
Consolidated Statements of Stockholders' Equity......................................  F-5
Consolidated Statements of Cash Flows................................................  F-6
Notes to Consolidated Financial Statements...........................................  F-7
FINANCIAL STATEMENTS OF NEW YORK N2K
Independent Auditors' Report.........................................................  F-18
Balance Sheet........................................................................  F-19
Statement of Operations..............................................................  F-20
Statement of Stockholders' Equity....................................................  F-21
Statement of Cash Flows..............................................................  F-22
Notes to Financial Statements........................................................  F-23
F-1
64
 
     After the one-for-three reverse stock split of each outstanding share of
Common stock and the reorganization of the Company as a Delaware corporation as
discussed in Note 1 to the Consolidated Financial Statements is effected, we
expect to be in a position to render the following audit report.
 
                                          /s/  ARTHUR ANDERSEN LLP
 
Philadelphia, Pa.
June 21, 1996
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To N2K Inc.
 
     We have audited the accompanying consolidated balance sheets of N2K Inc. (a
Delaware corporation) and subsidiary as of December 31, 1994 and 1995 and March
31, 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995 and the three months ended March 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of N2K Inc. and subsidiary as
of December 31, 1994 and 1995 and March 31, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 and the three months ended March 31, 1996, in conformity with
generally accepted accounting principles.
 
                                       F-2
65
 
                            N2K INC. AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
                                                                   ---------------------------      MARCH 31,
                                                                      1994            1995             1996
                                                                   -----------     -----------     ------------       PRO FORMA
                                                                                                                    STOCKHOLDERS'
                                                                                                                       EQUITY
                                                                                                                    -------------
                                                                                                                     (UNAUDITED)
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents......................................  $ 1,469,764     $   547,624     $  1,484,697
  Restricted cash................................................      500,000         500,000          500,000
  Accounts receivable, net of allowance for doubtful accounts of
    $49,073,
    $42,944 and $56,426..........................................    1,984,388       1,498,549        1,655,447
  Prepaid expenses...............................................       71,417         101,642          190,075
                                                                   -----------     -----------     ------------
    Total current assets.........................................    4,025,569       2,647,815        3,830,219
                                                                   -----------     -----------     ------------
PROPERTY AND EQUIPMENT:
  Computer equipment.............................................    1,427,318       1,717,416        1,473,162
  Office furniture and equipment.................................       99,636         141,895          163,515
  Leasehold improvements.........................................       63,170          69,534          135,376
  Property and equipment under capital leases....................      489,953         649,052        1,018,686
                                                                   -----------     -----------     ------------
                                                                     2,080,077       2,577,897        2,790,739
  Less -- Accumulated depreciation and amortization..............   (1,518,194)     (1,756,752)      (1,312,883)
                                                                   -----------     -----------     ------------
    Net property and equipment...................................      561,883         821,145        1,477,856
                                                                   -----------     -----------     ------------
OTHER ASSETS:
  Restricted cash................................................      167,000         167,000          167,000
  Goodwill, net..................................................           --              --          273,000
  Other..........................................................       22,471          22,700           58,670
                                                                   -----------     -----------     ------------
    Total other assets...........................................      189,471         189,700          498,670
                                                                   -----------     -----------     ------------
                                                                   $ 4,776,923     $ 3,658,660     $  5,806,745
                                                                   ===========     ===========     ============
                                              LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Line of credit.................................................  $        --     $   400,000     $         --
  Current portion of capital lease obligations...................       96,747          63,504          179,053
  Accounts payable...............................................      418,935         387,984          779,902
  Accrued vendor.................................................    1,047,087       1,061,200        1,143,893
  Accrued compensation...........................................      187,116         231,451          185,596
  Other accrued liabilities......................................      389,535         412,884          412,892
  Deferred revenues..............................................       73,933          70,592           58,750
                                                                   -----------     -----------     ------------
    Total current liabilities....................................    2,213,353       2,627,615        2,760,086
                                                                   -----------     -----------     ------------
LONG-TERM LIABILITIES:
  Capital lease obligations......................................       66,387         149,253          362,525
  Other..........................................................      253,479         232,808          267,796
                                                                   -----------     -----------     ------------
    Total long-term liabilities..................................      319,866         382,061          630,321
                                                                   -----------     -----------     ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
  Preferred stock $.001 par value, 20,000,000 shares authorized,
    4,056,695, 4,056,695 and 9,154,555 issued and outstanding;
    none issued and outstanding pro forma........................        4,057           4,057            9,155     $         --
  Common stock, $.001 par value, 100,000,000 shares authorized,
    2,089,286, 2,089,319 and 3,886,548 shares issued and
    outstanding; 7,672,812 shares issued and outstanding pro
    forma........................................................        2,089           2,089            3,887            7,673
  Additional paid-in capital.....................................    8,539,175       8,539,255       15,683,925       15,689,294
  Accumulated deficit............................................   (6,301,617)     (7,896,417)     (13,280,629)     (13,280,629 )
                                                                   -----------     -----------     ------------     ------------
    Total stockholders' equity...................................    2,243,704         648,984        2,416,338     $  2,416,338
                                                                                                                    ============
                                                                   -----------     -----------     ------------
                                                                   $ 4,776,923     $ 3,658,660     $  5,806,745
                                                                   ===========     ===========     ============
The accompanying notes are an integral part of these statements.
 
                                       F-3
66
 
                            N2K INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED                          THREE MONTHS
                                             DECEMBER 31,                        ENDED MARCH 31,
                               -----------------------------------------    -------------------------
                                  1993           1994           1995                         1996
                               -----------    -----------    -----------       1995       -----------
                                                                            ----------
                                                                            (UNAUDITED)
Revenues:
  Entertainment............... $        --    $        --    $    96,505    $       --    $   216,800
  Information services........  10,360,257     11,391,780     10,976,711     3,204,151      2,514,382
                               -----------    -----------    -----------    ----------    -----------
                                10,360,257     11,391,780     11,073,216     3,204,151      2,731,182
                               -----------    -----------    -----------    ----------    -----------
Cost of revenues:
  Entertainment...............          --             --         85,176            --        213,003
  Information services........   5,747,293      6,558,541      6,489,472     1,863,647      1,591,641
                               -----------    -----------    -----------    ----------    -----------
                                 5,747,293      6,558,541      6,574,648     1,863,647      1,804,644
                               -----------    -----------    -----------    ----------    -----------
          Gross profit........   4,612,964      4,833,239      4,498,568     1,340,504        926,538
                               -----------    -----------    -----------    ----------    -----------
Operating expenses:
  Operating and development...   1,350,057      1,777,654      2,267,852       536,721      1,247,573
  Sales and marketing.........   1,213,829      1,364,198      2,575,618       501,172        430,993
  General and
     administrative...........   1,471,150      1,564,658      1,337,731       343,241        507,255
  Charge for purchased
     research and
     development..............          --             --             --            --      4,133,281
                               -----------    -----------    -----------    ----------    -----------
          Operating income
            (loss)............     577,928        126,729     (1,682,633)      (40,630)    (5,392,564)
Interest income...............      43,761         73,359        106,370        27,683         24,904
Interest expense..............     (82,890)       (48,398)       (18,237)       (3,544)       (16,552)
                               -----------    -----------    -----------    ----------    -----------
          Income (loss) before
            income taxes......     538,799        151,690     (1,594,500)      (16,491)    (5,384,212)
Income taxes..................      33,913          9,280            300           663             --
                               -----------    -----------    -----------    ----------    -----------
Net income (loss)............. $   504,886    $   142,410    $(1,594,800)   $  (17,154)   $(5,384,212)
                               ===========    ===========    ===========    ==========    ===========
Pro forma net loss per common
  share (unaudited)...........                               $     (0.15)                 $     (0.49)
                                                             ===========                  ===========
Shares used in computing pro
  forma net loss per common
  share (unaudited)...........                                10,939,989                   10,925,422
                                                             ===========                  ===========
The accompanying notes are an integral part of these statements.
 
                                       F-4
67
 
                            N2K INC. AND SUBSIDIARY
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
                                    PREFERRED    COMMON      PAID-IN      ACCUMULATED
                                      STOCK      STOCK       CAPITAL        DEFICIT          TOTAL
                                    ---------    ------    -----------    ------------    -----------
BALANCE, DECEMBER 31, 1992........   $ 3,257     $2,089    $ 6,980,811    $ (6,948,913)   $    37,244
  Net income......................        --        --              --         504,886        504,886
                                      ------     ------     ----------     -----------    -----------
BALANCE, DECEMBER 31, 1993........     3,257     2,089       6,980,811      (6,444,027)       542,130
  Issuance of Series D Preferred
     stock, net...................       800        --       1,558,284              --      1,559,084
  Common stock options
     exercised....................        --        --              80              --             80
  Net income......................        --        --              --         142,410        142,410
                                      ------     ------     ----------     -----------    -----------
BALANCE, DECEMBER 31, 1994........     4,057     2,089       8,539,175      (6,301,617)     2,243,704
  Common stock options
     exercised....................        --        --              80              --             80
  Net loss........................        --        --              --      (1,594,800)    (1,594,800)
                                      ------     ------     ----------     -----------    -----------
BALANCE, DECEMBER 31, 1995........     4,057     2,089       8,539,255      (7,896,417)       648,984
  Issuance of Common stock and
     Series E Preferred stock in
     connection with purchase of
     N2K Inc......................     1,348     1,798       4,148,258              --      4,151,404
  Issuance of Series E Preferred
     stock........................     3,750        --       2,996,250              --      3,000,000
  Common stock options
     exercised....................        --        --             162              --            162
  Net loss........................        --        --              --      (5,384,212)    (5,384,212)
                                      ------     ------     ----------     -----------    -----------
BALANCE, MARCH 31, 1996...........   $ 9,155     $3,887    $15,683,925    $(13,280,629)   $ 2,416,338
                                      ======     ======     ==========     ===========    ===========
PRO FORMA BALANCE AFTER CONVERSION
  OF PREFERRED STOCK INTO COMMON
  STOCK (Note 1) (unaudited)......   $    --     $7,673    $15,689,294    $(13,280,629)   $ 2,416,338
                                      ======     ======     ==========     ===========    ===========
The accompanying notes are an integral part of these statements.
 
                                       F-5
68
 
                            N2K INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED                     THREE MONTHS ENDED
                                              DECEMBER 31,                         MARCH 31,
                                 --------------------------------------    -------------------------
                                   1993          1994          1995           1995          1996
                                 ---------    ----------    -----------    ----------    -----------
                                                            (UNAUDITED)
OPERATING ACTIVITIES:
  Net income (loss)............. $ 504,886    $  142,410    $(1,594,800)   $  (17,154)   $(5,384,212)
  Adjustments to reconcile net
     income (loss) to net cash
     provided by (used in)
     operating activities --
     Depreciation and
       amortization.............   269,530       290,653        238,558        69,712        118,382
     Provision for doubtful accounts...    18,000     18,000          --           --          4,500
     Charge for purchased
       research and
       development..............        --            --             --            --      4,133,281
     Decrease (increase) in --
          Accounts receivable...  (137,348)     (202,463)       485,839      (495,506)       (83,308)
          Prepaid expenses......    35,237       (26,343)       (30,225)        6,077        (84,893)
          Other assets..........    14,191         7,367           (229)          187            642
     Increase (decrease) in --
          Accounts payable......  (120,905)       89,793        (30,951)     (245,811)       391,918
          Accrued vendor........   529,664      (460,180)        14,113       241,250         82,693
          Accrued
            compensation........    23,498        43,025         44,335       (52,490)       (45,855)
          Other accrued
            liabilities.........  (124,840)       30,897         23,349       263,399       (387,891)
          Deferred revenues.....  (116,383)      (28,665)        (3,341)      (28,000)       (11,842)
          Other long-term
            liabilities.........   (26,969)          (47)       (20,671)       (5,089)        17,769
                                 ---------     ---------    -----------     ---------    -----------
     Net cash provided by (used
       in) operating
       activities...............   868,561       (95,553)      (874,023)     (263,425)    (1,248,816)
                                 ---------     ---------    -----------     ---------    -----------
INVESTING ACTIVITIES:
  Purchases of property and
     equipment..................  (128,495)     (255,847)      (338,721)      (64,786)      (167,625)
  Acquisition of N2K Inc., net
     of cash acquired...........        --            --             --            --       (224,077)
                                 ---------     ---------    -----------     ---------    -----------
     Net cash used in investing
       activities...............  (128,495)     (255,847)      (338,721)      (64,786)      (391,702)
                                 ---------     ---------    -----------     ---------    -----------
FINANCING ACTIVITIES:
  Net borrowings (repayments)
     under line of credit....... $(100,000)   $ (400,000)   $   400,000    $       --    $  (400,000)
  Payments on capital lease
     obligations................  (102,807)     (117,959)      (109,476)      (29,164)       (22,571)
  Payment on subordinated
     note.......................  (150,000)      (75,000)            --            --             --
  Proceeds from issuance of
     Preferred stock, net.......        --     1,559,084             --            --      3,000,000
  Proceeds from exercise of
     common stock options.......        --            80             80            80            162
                                 ---------     ---------    -----------     ---------    -----------
     Net cash provided by (used
       in) financing
       activities...............  (352,807)      966,205        290,604       (29,084)     2,577,591
                                 ---------     ---------    -----------     ---------    -----------
INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS..............   387,259       614,805       (922,140)     (357,295)       937,073
CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD...........   467,700       854,959      1,469,764     1,469,764        547,624
                                 ---------     ---------    -----------     ---------    -----------
CASH AND CASH EQUIVALENTS, END
  OF PERIOD..................... $ 854,959    $1,469,764    $   547,624    $1,112,469    $ 1,484,697
                                 =========     =========    ===========     =========    ===========
The accompanying notes are an integral part of these statements.
 
                                       F-6
69
 
                            N2K INC. AND SUBSIDIARY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (INFORMATION FOR THE THREE MONTHS ENDED
                          MARCH 31, 1995 IS UNAUDITED)
 
1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
THE COMPANY
 
  Background
 
     N2K Inc. (formerly Telebase Systems, Inc.) (the Company or N2K) was formed
as a result of the merger in February 1996, of N2K Inc., which was founded in
1995 as a developer of online music entertainment content and Telebase Systems,
Inc. (Telebase), which was founded in 1984 as a provider of online content and
information retrieval services (see Note 2). In 1995, recognizing increasing
opportunities in the consumer entertainment market, Telebase expanded its online
strategy to include music entertainment.
 
     The Company is a music entertainment company focused on providing original
content, interactive programming and recorded music using the Internet as a new
global marketing, promotion and distribution medium. By combining its music
industry and technical expertise, N2K has created an interactive, entertaining
and content-rich online environment, which includes its award-winning
merchandising website, Music Boulevard, music genre websites, Jazz Central
Station and Rocktropolis, and individual artist sites for such artists as David
Bowie and the Rolling Stones. These websites provide a comprehensive
entertainment and information resource enabling users to search and sample music
and artist information interactively through sound, video and graphics. Each of
the music genre and individual artist websites features a hotlink directly with
Music Boulevard to facilitate purchases of CDs, cassettes and related
merchandise. The Company plans to introduce its own recorded music label, N2K
Encoded Music, with its first release scheduled for October 1996. N2K Encoded
Music CDs will be enhanced with multimedia capabilities and will be marketed and
sold through the Company's Internet websites as well as through traditional
retail and other distribution channels.
 
     To date, the Company has derived its revenues primarily from its online
business information and gateway retrieval services. The Company recently
shifted the focus of its business to music entertainment delivered via the
Internet and expects to derive an increasingly larger portion of its revenues
from the music entertainment business, including the planned N2K Encoded Music
label and the sales of advertising on its music-related websites. Due to the
Company's recent shift in business focus, the Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new, unproven and rapidly evolving markets. To
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
employees, continue to upgrade its technologies and commercialize its products
and services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks. If the Company is not
successful in developing and expanding its music entertainment business,
including the planned N2K Encoded Music label and the sales of advertising on
its music-related websites, the Company's ability to achieve profitability would
be materially adversely affected.
 
  Unaudited Pro Forma Stockholders' Equity
 
     In conjunction with the proposed initial public offering of the Company's
Common stock (the Offering), all of the outstanding shares of the Series A,
Series B, Series C, Series D and Series E Preferred stock will convert into
Common stock upon the consummation of the Offering. The unaudited pro forma
stockholders' equity at March 31, 1996 reflects the assumed conversion of the
Series A, Series B, Series C, Series D and Series E Preferred stock into
228,369, 238,095, 800,000, 820,513, and 1,699,287 shares, respectively, of
Common Stock.
 
                                       F-7
70
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stock Split and Reorganization
 
     On   , 1996, the Company effected a one- for- three reverse stock split of
each outstanding share of Common stock in N2K Inc., a Pennsylvania corporation,
to be effected prior to the reorganization of N2K Inc. as a Delaware corporation
which will occur immediately prior to the date of this Prospectus. All share,
stock option and warrant data have been restated to reflect the reverse stock
split.
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Interim Financial Statements
 
     The financial statements for the three months ended March 31, 1995 are
unaudited and, in the opinion of management, include all adjustments (consisting
only of normal and recurring adjustments) necessary for a fair presentation of
results for this interim period. The results of operations for the three months
ended March 31, 1995 and 1996 are not necessarily indicative of the results to
be expected for the entire year.
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
 
  Property and Equipment
 
     Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, which is
primarily four years. Leasehold improvements are amortized over the shorter of
the estimated useful life or the lease term. Improvements and betterments are
capitalized, and maintenance and repair costs are charged to expense as
incurred. Upon retirement or disposition, the applicable property amounts are
relieved from the accounts, and any gain or loss is recorded in the consolidated
statement of operations. When assets become fully depreciated or amortized, the
applicable asset and accumulated depreciation amounts are relieved.
 
  Goodwill
 
     Goodwill represents the excess of the purchase price of the N2K acquisition
(see Note 2) over the value of net assets acquired. Goodwill is amortized on a
straight-line basis over 5 years. Amortization expense was $7,000 for the three
months ended March 31, 1996. The Company evaluates the realizability of goodwill
based on estimates of undiscounted future cash flows over the remaining useful
life of the asset. If the amount of such estimated undiscounted future cash
flows is less than the net book value of the asset, the asset is written down to
the amount of the estimated undiscounted cash flows. As of March 31, 1996, no
such write-down was required.
 
  Pro Forma Net Loss Per Common Share (Unaudited)
 
     Pro forma net loss per Common share was calculated by dividing net loss by
the weighted average number of common shares outstanding for the respective
periods adjusted for the dilutive effect of common stock equivalents, which
consist of stock options using the treasury stock method. Pursuant to the
requirements of the Securities and Exchange Commission, common stock issued by
the Company during the twelve months immediately preceding the initial public
offering, plus the number of common equivalent shares which became issuable
during the same period pursuant to the grant of common stock options and
warrants, have been included in the calculation of the shares used in computing
pro forma net loss per Common share as if they were outstanding for all periods
presented (using the treasury stock method and the initial public offering price
of $11.00 per Common share). Pursuant to the policy of the staff of the
Securities and Exchange Commission, the calculation of shares used in computing
pro forma net loss per Common share
 
                                       F-8
71
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
also includes the Series A, Series B, Series C and Series D Preferred stock
which will convert into 228,369, 238,095, 800,000 and 820,513 shares,
respectively, of Common stock upon the consummation of the Offering contemplated
by this Prospectus as if they were converted to Common stock on their original
date of issuance. The Series E and Series F Preferred Stock, which will convert
into 2,002,354 and 1,777,777 shares, respectively, of Common stock upon the
consummation of the Offering, have been included as outstanding for all periods
presented since they were issued during the twelve months immediately preceding
the initial public offering (see Note 4). Additionally, all common share and per
share amounts have been adjusted retroactively to give effect to the
pooling-of-interests transaction that occurred with Advanced Research
Technologies, Inc. (ART) on December 15, 1995 (see Note 2).
 
  Revenue Recognition
 
     Search (information services) revenues are recorded in the period in which
they are earned. Entertainment revenues which consist of music compact discs and
cassettes sold via the Internet, and includes shipping and handling charges, are
recognized as the product is shipped. The Company records the estimated gross
profit which will be lost due to current year's shipments being returned in
future periods as a reduction of sales and cost of sales in the period of
shipment.
 
  Deferred Revenues
 
     Deferred revenues represent amounts collected from or invoiced to customers
in excess of revenues recognized. Such amounts are recognized as revenue when
the related service is performed.
 
  Operating and development
 
     Operating and development expenses consist of software, engineering,
multimedia production, graphic design and computer operations used in the
development, operation and maintenance of the Company's services. For the year
ended December 31, 1995 and for the three months ended March 31, 1995 and 1996,
the Company incurred costs of $1,263,323, $286,549 and $495,894, respectively,
relating to research and development. These amounts are included in operating
and development expenses as shown on the accompanying consolidated statements of
operations. For the periods prior to 1995, the Company did not separately
identify research and development costs.
 
  Charge for Purchased Research and Development
 
     In connection with the acquisition of N2K Inc. (see Note 2) in February
1996, $4,133,281 of the purchase price was allocated to incomplete research and
development projects. Accordingly, these costs were charged to expense as of the
acquisition date. The amount allocated to the incomplete research and
development projects was determined by an independent appraisal. The development
of these projects had not yet reached technological feasibility and the
technology has no alternative future use. The technology acquired in the
acquisition of N2K Inc. will require substantial additional development by the
Company.
 
  Cash and Cash Equivalents
 
     For purposes of the Consolidated Statements 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
various mutual and money market funds.
 
  Supplemental Disclosures of Cash Flow Information
 
     For the years ended December 31, 1993, 1994, and 1995, and for the three
months ended March 31, 1995 and 1996, the Company paid interest of $90,805,
$50,809, $18,237, $3,544 and $16,552, respectively. For the
 
                                       F-9
72
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
years ended December 31, 1993, 1994 and 1995, and for the three months ended
March 31, 1995 and 1996, the Company has received interest income of $50,721,
$67,263, $109,244, $28,706 and $23,791, respectively. Income taxes paid in 1993,
1994, 1995 and 1996 were immaterial. In addition, the Company incurred $84,387,
$159,099 and $43,013 in capital lease obligations during 1994, 1995 and for the
three months ended March 31, 1996, respectively. No capital lease obligations
were incurred in 1993 or during the three months ended March 31, 1995. The
following table displays the non cash assets and liabilities that were
consolidated as a result of the N2K acquisition (see Note 2):
Noncash assets (liabilities):
      Accounts receivable...................................................  $    78,090
      Prepaid expenses......................................................        3,540
      Property and equipment................................................      557,455
      Other assets..........................................................       36,612
      Goodwill..............................................................      280,000
      Charge for purchased research and development.........................    4,133,281
      Accounts payable and other accrued liabilities........................     (405,118)
      Capital lease obligations.............................................     (308,379)
                                                                              -----------
         Net noncash assets acquired........................................    4,375,481
         Less -- Preferred stock issued.....................................   (1,078,286)
                 Common stock issued........................................   (3,073,118)
                                                                              -----------
      Cash paid, net of cash acquired.......................................  $   224,077
                                                                              ===========
Major Customers and Suppliers
 
     The Company sells its services and products primarily to large companies in
the online service industry. CompuServe Incorporated and the EasyLink Services
Division of AT&T accounted for 70% and 11% of revenues for the year ended
December 31, 1993, respectively. CompuServe Incorporated and NIFTY Corp.
accounted for 75% and 10% of revenues for the year ended December 31, 1994 and
76% and 11% of revenues for the year ended December 31, 1995, respectively.
CompuServe Incorporated and NIFTY Corp. accounted for 69% and 11% of revenues
for the three months ended March 31, 1996, respectively. As of December 31,
1994, the Company had accounts receivable from CompuServe Incorporated and NIFTY
Corp. of $1,510,207 and $69,376, respectively. As of December 31, 1995, the
Company had accounts receivable from CompuServe Incorporated and NIFTY Corp. of
$1,169,042 and $87,993, respectively. As of March 31, 1996, the Company had
accounts receivable from CompuServe Incorporated and NIFTY Corp. of $1,345,252
and $95,431, respectively. The Company has one vendor that accounted for 66%,
59%, 60% and 53% of the cost of revenues for the years ended December 31, 1993,
1994, 1995 and for the three months ended March 31, 1996, respectively. As of
December 31, 1994, 1995 and March 31, 1996, this same vendor was due $890,043,
$858,235 and $951,420. These amounts are included in accrued vendor on the
accompanying consolidated balance sheets and represent the direct cost incurred
to information providers for the content used in the Company's information
services segment.
 
  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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
                                      F-10
73
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Stock-Based Compensation Plans
 
     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. This statement
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company is required to adopt
SFAS 123 effective January 1, 1996. The Company has elected to adopt the
disclosure requirement of this pronouncement. The adoption of the disclosure
requirements is expected to have no impact on the Company's financial position
or results of operations.
 
2.  ACQUISITIONS:
 
  Merger with Advanced Research Technologies, Inc. (ART)
 
     On December 15, 1995, a wholly owned subsidiary of the Company, ART
Acquisition Corp., was merged with and into ART, an online information retrieval
service business, pursuant to which ART became a wholly owned subsidiary of the
Company, in exchange for 150,000 shares of the Company's Common stock in a
transaction accounted for as a pooling-of-interests. Prior to December 31, 1995,
ART Acquisition Corp. was merged into the Company. Accordingly, the financial
statements for 1993, 1994 and 1995 have been restated to include ART. A
reconciliation of revenues and net income (loss) for the Company and ART for the
periods presented is as follows:
N2K           ART          POOLED
                                                    -----------     --------     -----------
Year ended December 31, 1993:
      Revenues....................................  $10,042,832     $317,425     $10,360,257
      Net income (loss)...........................      504,962          (76)        504,886
    Year ended December 31, 1994:
      Revenues....................................  $11,008,262     $383,518     $11,391,780
      Net income (loss)...........................      173,458      (31,048)        142,410
    Year-ended December 31, 1995:
      Revenues....................................  $10,610,799     $462,417     $11,073,216
      Net loss....................................   (1,562,995)     (31,805)     (1,594,800)
The difference in the stated value of the shares issued as compared to the
stated value of the shares of ART have been reflected as an increase in
additional paid-in capital.
 
  Acquisition of N2K Inc.
 
     On February 13, 1996, N2K Inc. (N2K), a New York corporation, merged with
and into Telebase Systems, Inc. in a transaction accounted for as a purchase.
Telebase Systems, Inc. issued 1,797,146 shares of Common Stock valued at
$3,073,118 and 1,347,860 shares of its newly created Series E Preferred stock
valued at $1,078,286 in exchange for all of the outstanding Common stock of N2K.
The fair value assigned to the Common stock was determined based upon an
independent appraisal. Telebase Systems, Inc. is the surviving corporation;
however, the corporate name of the surviving corporation has been changed to N2K
Inc. The results of the acquired business have been included in the consolidated
financial statements from the date of acquisition. The total purchase price of
$4,413,281, including transaction costs, was allocated to the assets acquired
and liabilities assumed based on their respective fair values. As discussed in
Note 1, the Company recorded $4,133,281 of the purchase price as a charge to the
consolidated statements of operations on the acquisition date as it was related
to the fair value of incomplete research and development projects. The excess of
the purchase price over the fair value of the net assets acquired (goodwill) was
$280,000 and is being amortized over 5 years on a straight-line basis. If the
acquisition of N2K had occurred on January 1, 1995, the
 
                                      F-11
74
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
unaudited pro forma information, after giving effect to certain pro forma
adjustments, would have been as follows:
THREE MONTHS
                                                         YEAR ENDED             ENDED
                                                      DECEMBER 31, 1995     MARCH 31, 1996
                                                      -----------------     --------------
Unaudited pro forma revenues....................     $11,216,842         $  2,799,809
                                                         ===========          ===========
    Unaudited pro forma net loss....................     $(2,839,579)        $ (1,634,819)
                                                         ===========          ===========
    Unaudited pro forma net loss per Common share...     $     (0.26)        $      (0.15)
                                                         ===========          ===========
The above pro forma information excludes the one time charge of $4,133,281
associated with the write-off of purchased research and development costs.
 
     On February 13, 1996, the Company sold 3,750,000 shares of Series E
Preferred stock at $.80 per share and received gross proceeds of $3,000,000 (see
Note 4).
 
  Acquisition of Rocktropolis Website
 
     On June 21, 1996, the Company acquired the rock website, Rocktropolis, from
Rocktropolis Enterprises, LLC for $633,000 in cash and 59,722 shares of Common
stock. The acquisition will be accounted for as a purchase. The Company will
charge to expense as of the date of the acquisition a significant portion of the
purchase price as a one-time charge to record the write-off of purchased
research and development. Such charge to expense will be recorded in the quarter
ending June 30, 1996.
 
3.  CREDIT AGREEMENTS:
 
     The Company has a line of credit with a bank of $1,000,000 as of March 31,
1996. The line of credit expires on June 30, 1996, at which time the outstanding
principal balance, if any, becomes payable unless the line of credit is
extended. The Company is obligated to pay a commitment fee equal to .5% on the
average daily unused portion of the commitment. The line of credit bears
interest at the prime rate for borrowings which do not exceed $500,000 and at
the prime rate plus 1% for borrowings which exceed $500,000 and is secured by a
$500,000 certificate of deposit and a security interest in substantially all
corporate assets. The $500,000 is shown as restricted cash in current assets on
the accompanying consolidated balance sheets. Maximum borrowings are limited to
certain percentages of eligible accounts receivable (as defined), plus the
$500,000 certificate of deposit. As of June 21, 1996, the Company is negotiating
an extension of this line of credit. During 1994, 1995 and the three months
ended March 31, 1996, the maximum amount outstanding was $500,000, $400,000 and
$600,000, respectively. For the years ended December 31, 1993, 1994, and 1995,
and for the three months ended March 31, 1996, the weighted average interest
rate was 7%, 7.5%, 8.7% and 8.5%, respectively. No amount was outstanding during
the three months ended March 31, 1995. In addition, this line of credit requires
the Company to meet certain financial covenants. Interest expense for the years
ended December 31, 1993, 1994 and 1995, and for the three months ended March 31,
1996, was $34,203, $21,236, $7,360 and $4,992, respectively. No interest expense
was incurred for the three months ended March 31, 1995.
 
                                      F-12
75
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In January 1989, the Company entered into a $300,000 subordinated note
agreement with the Philadelphia Industrial Development Corporation (PIDC). The
note was unsecured and bore interest at 13%, payable quarterly. The final
principal payment of $75,000 was paid in December 1994. Interest expense was
$19,500 in 1993 and $9,750 in 1994.
 
4.  PREFERRED STOCK:
 
     Preferred stock consists of the following:
DECEMBER 31,
                                                              -----------------     MARCH 31,
                                                               1994       1995        1996
                                                              ------     ------     ---------
Preferred stock, $.001 stated value, 20,000,000 shares
      authorized and designated as follows --
      Series A, 500,000 shares authorized, 488,838 shares
         issued and outstanding.............................  $  489     $  489      $   489
      Series B, 625,000 shares authorized, issued and
         outstanding........................................     625        625          625
      Series C, 2,857,143 shares authorized, 2,142,857
         shares issued and outstanding......................   2,143      2,143        2,143
      Series D, 1,000,000 shares authorized, 800,000 shares
         issued and outstanding.............................     800        800          800
      Series E, 5,097,860 shares authorized, 5,097,860
         shares issued and outstanding......................      --         --        5,098
                                                              ------     ------     ---------
                                                              $4,057     $4,057      $ 9,155
                                                              ======     ======      =======
In January 1988, the Company issued 488,838 shares of Series A Preferred
stock at $1.25 per share upon the conversion of certain liabilities. The Series
A Preferred shares are convertible into 228,369 shares of Common stock, subject
to adjustment (as defined).
 
     In March 1988, the Company sold 625,000 shares of Series B Preferred stock
for $1,000,000. In August 1988, the Company sold 2,142,857 shares of Series C
Preferred stock for $3,000,000. In 1993, the Series C Preferred stockholder sold
all of its shares to various outside investors, as well as to officers of the
Company. The Series B and Series C Preferred shares are convertible into 238,095
and 800,000 shares of Common stock, respectively, subject to adjustment (as
defined).
 
     In September 1994, the Company sold 800,000 shares of Series D Preferred
stock at $2 per share and received net proceeds of $1,559,084. The Series D
Preferred shares are convertible into 820,513 shares of Common stock, subject to
adjustment (as defined).
 
     On February 13, 1996, the Company sold 1,347,860 shares of Series E
Preferred Stock in connection with the acquisition of N2K. (See Note 2). Also,
on February 13, 1996, the Company sold 3,750,000 shares of Series E Preferred
Stock for $.80 per share and received gross proceeds of $3,000,000. The Series E
Preferred shares are convertible into 1,699,287 shares of Common stock, subject
to adjustment (as defined).
 
     Subsequent to March 31, 1996, the Company sold 909,200 shares of Series E
Preferred stock at $.80 per share and received net proceeds of approximately
$700,000. The Series E Preferred shares are convertible into 303,067 shares of
Common stock, subject to adjustment (as defined). Additionally, subsequent to
March 31, 1996, the Company sold 5,333,333 shares of Series F Preferred stock at
$3 per share and received net proceeds
 
                                      F-13
76
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
of approximately $15,200,000. The Series F Preferred shares are convertible into
1,777,777 shares of Common stock, subject to adjustment (as defined).
 
     The Company has reserved 5,867,108 shares of Common stock for the
conversion of all series of Preferred stock. Each series of Preferred stock has
voting rights equal to the number of shares that would be received if it was
converted into Common stock.
 
5.  STOCKHOLDERS' EQUITY:
 
  Common Stock Options
 
     Under the Company's 1987 Incentive Stock Option Plan, options to purchase
1,033,333 shares of Common stock may be granted to certain officers, directors
and employees. The options expire ten years from the date of grant and vest over
four years. Expiration dates range from 1997 to 2005. As of March 31, 1996, no
additional grants will be made under this plan.
 
     Additionally, the Company has 101,521 nonqualified stock options
outstanding as of March 31, 1996, with expiration dates ranging from January
1997 to January 2004. These options vest immediately upon grant.
 
     In February 1996, the Company established the 1996 Stock Option Plan, which
authorized options to purchase 2,200,000 shares of Common stock, as amended and
restated on June 20, 1996. Under the 1996 Stock Option Plan, options may be
granted to officers, directors and other key employees. The options expire ten
years from the date of grant and vest over four years, unless specifically
agreed to otherwise. The exercise price is fixed at the grant date and shall
equal at least 100% of the fair market value of the Common stock on the date of
grant.
 
     Information relative to the 1987 Incentive Stock Option Plan, the
nonqualified stock options and the 1996 Stock Option Plan is as follows:
OPTION PRICE     AGGREGATE
                                                         OPTIONS       (PER SHARE)      PROCEEDS
                                                        ---------     -------------    ----------
Balance as of December 31, 1992.......................    419,188      $1.875-$3.75    $1,224,884
  Granted.............................................     57,666             $2.40       138,400
  Exercised...........................................         --                --            --
  Terminated..........................................    (52,000)     $ 2.40-$3.75      (169,800)
                                                        ---------      ------------    ----------
Balance as of December 31, 1993.......................    424,854      $1.875-$3.75     1,193,484
  Granted.............................................    106,333      $ 1.95-$2.40       210,200
  Exercised...........................................        (33)            $2.40           (80)
  Terminated..........................................     (1,966)            $2.40        (4,720)
                                                        ---------      ------------    ----------
Balance as of December 31, 1994.......................    529,188      $1.875-$3.75     1,398,884
  Granted.............................................    308,500      $ 1.95-$2.40       608,325
  Exercised...........................................        (33)            $2.40           (80)
  Terminated..........................................     (7,800)            $2.40       (18,720)
                                                        ---------      ------------    ----------
Balance as of December 31, 1995.......................    829,855      $1.875-$3.75     1,988,409
  Granted.............................................  1,100,264      $ 2.40-$2.64     2,765,434
  Exercised...........................................        (83)            $1.95          (162)
  Terminated..........................................    (77,417)     $ 1.95-$2.40      (176,763)
                                                        ---------      ------------    ----------
Balance as of March 31, 1996..........................  1,852,619      $1.875-$3.75    $4,576,918
                                                        =========      ============    ==========
Options exercisable as of March 31, 1996..............    395,021
                                                        =========
F-14
77
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Subsequent to March 31, 1996, the Company granted options to purchase
28,333 shares of Common stock at an exercise price of $2.40 per share. These
options were issued under the 1996 Stock Option Plan. As of June 20, 1996,
1,071,403 options are available for grant under the 1996 Stock Option Plan.
 
  Common Stock Warrants
 
     In February 1996, the Company issued warrants to purchase 50,000 shares of
Common stock at an exercise price of $2.40 per share. These warrants expire in
February 2001. Subsequent to March 31, 1996, the Company issued warrants to
purchase 85,555 shares of Common stock at an exercise price of $9.00 per share.
These warrants expire in 2003.
 
  Employee Stock Purchase Plan
 
     In June 1996, the Company established the 1996 Employee Stock Purchase Plan
(the Plan). The number of shares available to purchase under the Plan is
1,500,000 shares of Common Stock. As of June 21, 1996, 1,500,000 shares are
available for purchase under the Plan. The employees purchase price is the lower
of (a) 85% of the fair market value of a share of the Company's Common stock on
the first day of a Purchase period (as defined) or (b) 85% of the fair market
value of a share of the Company's Common stock on the last day of the Purchase
period (as defined).
 
6.  INCOME TAXES:
 
     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires an asset-and-liability approach in accounting for income
taxes. Under this method, deferred income taxes are computed based on the
differences between financial reporting and income tax reporting of assets and
liabilities using enacted tax rates.
 
     As of December 31, 1995, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $6,800,000, which begin to
expire in 2001. Significant components of deferred income taxes consist of the
following:
DECEMBER 31
                                                                    ---------------------------
                                                                       1994            1995
                                                                    -----------     -----------
Gross deferred tax asset:
  Net operating loss carryforwards................................  $ 1,995,000     $ 2,584,000
  Depreciation and amortization...................................       15,200          38,000
  Accruals not currently deductible...............................      159,000         152,500
                                                                       --------        --------
                                                                      2,169,200       2,774,500
  Less: Valuation allowance.......................................   (2,169,200)     (2,774,500)
                                                                       --------        --------
                                                                    $   --          $   --
                                                                       ========        ========
No tax benefits have been recognized in the accompanying consolidated
statements of operations due to the valuation allowance. The valuation allowance
increased $605,300 during 1995 due principally to net operating loss
carryforwards. Based on changes in ownership of the Company, utilization of the
net operating loss carryforwards may be subject to annual limitations.
 
7.  RELATED-PARTY TRANSACTIONS:
 
     The Company incurred $30,000 in consulting fees to a Board member in 1993.
None were incurred in 1994, 1995 or the three months ended March 31, 1996. For
the years ended December 31, 1993, 1994, and 1995, and for the three months
ended March 31, 1995 and 1996, the Company incurred fees of $30,000,
 
                                      F-15
78
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
$30,000, $30,000, $1,000 and $79,000 to a law firm in which certain of its
partners are Series A Preferred stockholders.
 
8.  COMMITMENTS AND CONTINGENCIES:
 
     The Company has entered into various operating and capital leases for
office space, computer equipment and office equipment. Assets acquired under
capital leases at a cost of $489,953, $649,052 and $1,018,686, less accumulated
amortization of $338,351, $441,049 and $473,735, are included in property and
equipment in the accompanying consolidated balance sheets as of December 31,
1994, 1995 and March 31, 1996, respectively. Certain capital leases are secured
by certificates of deposit totaling $167,000, which are shown as restricted cash
in other assets on the accompanying consolidated balance sheets. Future minimum
lease payments under operating and capital leases as of December 31, 1995, are
as follows:
OPERATING      CAPITAL
                                                                   ----------     --------
1996.........................................................  $  265,274     $ 79,394
    1997.........................................................     263,641       71,855
    1998.........................................................     256,008       63,509
    1999.........................................................     251,658       30,701
    2000.........................................................     251,250           --
    2001 and thereafter..........................................     167,500           --
                                                                   ----------     --------
    Total minimum lease payments.................................  $1,455,331      245,459
                                                                   ==========
    Less -- Amount representing interest.........................                  (32,702)
                                                                                  --------
    Present value of minimum capital lease payments..............                 $212,757
                                                                                  ========
In connection with the acquisition of N2K on February 13, 1996 (see Note
2), the Company became obligated under certain additional operating and capital
leases for office space, computer equipment and office equipment. The future
minimum lease payments under these operating leases as of March 31, 1996 are as
follows: $157,227 in 1997, $170,560 in 1998, $220,489 in 1999, $219,555 in 2000
and $199,517 in 2001. The future minimum lease payments under these capital
leases as of March 31, 1996 are as follows: $143,110 in 1997, $139,173 in 1998
and $132,599 in 1999. Rent expense under the operating leases for the years
ended December 31, 1993, 1994, and 1995, and for the three months ended March
31, 1995 and 1996, was $288,284, $260,930, $270,136, $68,107 and $112,852,
respectively.
 
     The Company has an agreement with certain founders that requires royalty
payments of .825% to .9% on defined information services revenues. For the years
ended December 31, 1993, 1994, and 1995, and the three months ended March 31,
1995 and 1996, the Company incurred royalty expense of $95,000, $99,058,
$94,623, $27,523 and $21,425, respectively.
 
     The Company has employment agreements with certain officers.
 
     The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
 
9.  DEFINED CONTRIBUTION PLAN:
 
     The Company maintains a Matched Savings Plan (the Plan) in accordance with
the provisions of Section 401(k) of the Internal Revenue Code. The Plan covers
substantially all full-time employees of the Company. Participants may
contribute up to 15% of their total compensation to the Plan, with the Company
matching 30% of the participant's contribution, limited to 6% of the
participant's total compensation. For the years
 
                                      F-16
79
 
                            N2K INC. AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
ended December 31, 1993, 1994, and 1995 and the three months ended March 31,
1995 and 1996, the Company contributed $23,000, $32,500, $38,900, $10,100 and
$11,700, respectively, to the Plan.
 
10.  SEGMENT INFORMATION:
 
     The Company operates principally within two segments: Entertainment and
Information services. See Note 1 for description of each segment.
 
The following table highlights certain financial information about each of the
Company's segments for the year ended December 31, 1995.
INFORMATION     GENERAL AND
                                     ENTERTAINMENT     SERVICES      ADMINISTRATIVE    CONSOLIDATED
                                     -------------    -----------    --------------    ------------
Revenues...........................   $    96,505     $10,976,711               --     $11,073,216
                                      -----------     -----------      -----------     -----------
Operating income (loss)............   $(1,567,780)    $ 1,222,878               --     $  (344,902 )
                                      -----------     -----------      -----------     -----------
General and administrative
  expenses.........................            --              --     $  1,337,731     $ 1,337,731
Interest income, net...............            --              --     $    (88,133)    $   (88,133 )
                                                                                       -----------
Loss before income taxes...........            --              --               --     $(1,594,500 )
                                                                                       ===========
Depreciation and amortization......   $    18,793     $   117,488     $    102,277     $   238,558
                                      ===========     ===========      ===========     ===========
Capital expenditures...............   $   240,445     $    49,466     $     48,810     $   338,721
                                      ===========     ===========      ===========     ===========
Total identifiable assets at
  December 31, 1995................   $   275,768     $ 1,983,393     $  1,399,499     $ 3,658,660
                                      ===========     ===========      ===========     ===========
For the year ended December 31, 1995, information services revenues consisted of
$9,308,453 sales to domestic customers and $1,668,258 sales to international
customers.
 
                                      F-17
80
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors
N2K, Inc.
New York, New York
 
     We have audited the balance sheet of N2K, Inc. as of December 31, 1995, and
the related statements of operations, stockholders' equity and cash flows for
the period beginning March 7, 1995 (date of inception) through December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of N2K, Inc. as of December 31,
1995 and the results of its operations and its cash flows for the period
beginning March 7, 1995 through December 31, 1995 in conformity with generally
accepted accounting principles.
 
     As described in Note F, on February 13, 1996, the Company effected a
business combination in which it merged with a company formerly known as
Telebase Systems, Inc.
 
New York, New York
January 31, 1996
 
With respect to Note F
February 13, 1996
                                          /s/  RICHARD A. EISNER & COMPANY, LLP
 
                                      F-18
81
 
                                   N2K, INC.
                                 BALANCE SHEET
                               DECEMBER 31, 1995
ASSETS
Current assets:
     Cash and cash equivalents...................................................  $ 245,423
     Accounts receivable.........................................................     57,281
     Prepaid expenses............................................................      2,057
                                                                                    --------
          Total current assets...................................................    304,761
Property and equipment, net......................................................    311,812
Goodwill.........................................................................      4,467
Deposits.........................................................................    101,621
                                                                                    --------
          TOTAL..................................................................  $ 722,661
                                                                                    ========
                            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current maturities of capital lease obligations.............................  $  57,407
     Accounts payable and accrued expenses.......................................    207,144
                                                                                    --------
          Total current liabilities..............................................    264,551
Capital lease obligations........................................................    136,184
Deferred rent payable............................................................     20,038
                                                                                    --------
          Total liabilities......................................................    420,773
                                                                                    --------
Commitments and contingencies
Stockholders' equity:
     Common stock, $.01 par value, 2,000,000 authorized, 1,000,000 shares issued
      and outstanding............................................................     10,000
     Additional paid-in capital..................................................    990,000
     Accumulated (deficit).......................................................   (698,112)
                                                                                    --------
          Total stockholders' equity.............................................    301,888
                                                                                    --------
          TOTAL..................................................................  $ 722,661
                                                                                    ========
The accompanying notes to financial statements are an integral part hereof
 
                                      F-19
82
 
                                   N2K, INC.
                            STATEMENT OF OPERATIONS
                     FOR THE PERIOD BEGINNING MARCH 7, 1995
                 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
Revenues:
     Consulting revenue..........................................................  $ 132,626
     Network revenue.............................................................     11,000
                                                                                    --------
          Total revenue..........................................................    143,626
                                                                                    --------
Expenses:
     Selling, general and administrative expenses................................    767,628
     Purchased research and development..........................................     56,262
     Depreciation and amortization...............................................     16,575
                                                                                    --------
          Total expense..........................................................    840,465
                                                                                    --------
Operating loss...................................................................   (696,839)
Interest expense, net of interest income of $185.................................     (1,273)
                                                                                    --------
Net loss.........................................................................  $(698,112)
                                                                                    ========
The accompanying notes to financial statements are an integral part hereof
 
                                      F-20
83
 
                                   N2K, INC.
                       STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE PERIOD BEGINNING MARCH 7, 1995
                 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
ADDITIONAL
                                                COMMON      PAID-IN      ACCUMULATED
                                                 STOCK      CAPITAL       DEFICIT         TOTAL
                                                -------     --------     ----------     ----------
Sale of common stock..........................  $10,000     $990,000                    $1,000,000
Net loss......................................                           $ (698,112)      (698,112)
                                                -------     --------     ----------       --------
Balance -- December 31, 1995..................  $10,000     $990,000     $ (698,112)    $  301,888
                                                =======     ========     ==========       ========
The accompanying notes to financial statements are an integral part hereof
 
                                      F-21
84
 
                                   N2K, INC.
                            STATEMENT OF CASH FLOWS
                     FOR THE PERIOD BEGINNING MARCH 7, 1995
                 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
Cash flows from operating activities:
     Net loss....................................................................  $(698,112)
     Adjustments to reconcile net loss to net cash used in operating activities:
          Depreciation and amortization..........................................     16,575
          Changes in assets and liabilities:
               Increase in:
                    Accounts receivable..........................................    (48,543)
                    Prepaid expenses.............................................     (2,057)
                    Deposits.....................................................   (101,621)
                    Accounts payable and accrued expenses........................    207,144
                    Deferred rent payable........................................     20,038
                                                                                   ---------
                         Net cash used in operating activities...................   (606,576)
                                                                                   ---------
Cash flows from investing activities:
     Assets acquired in purchase transaction.....................................    (43,738)
     Purchase of property and equipment..........................................   (101,612)
                                                                                   ---------
                         Net cash used in investing activities...................   (145,350)
                                                                                   ---------
Cash flows from financing activities:
     Principal payments on capital lease obligations.............................     (2,651)
     Sale of common stock........................................................  1,000,000
                                                                                   ---------
                         Net cash provided by financing activities...............    997,349
                                                                                   ---------
Increase in cash and cash equivalents............................................    245,423
Cash and cash equivalents, beginning of period...................................         --
                                                                                   ---------
Cash and cash equivalents, end of period.........................................  $ 245,423
                                                                                   =========
Supplemental disclosures of cash flow information:
     Cash paid during the period for interest....................................  $   1,458
     Noncash investing and financing activity:
          The Company entered into capital leases for equipment valued at
          $196,242.
The accompanying notes to financial statements are an integral part hereof
 
                                      F-22
85
 
                                   N2K, INC.
                         NOTES TO FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION AND ACQUISITION:
 
     N2K Multimedia Company, Inc. (the "Company") was incorporated on March 7,
1995 for the purpose of developing interactive online web sites and technology,
with 200 shares of authorized common stock of which 100 shares were issued in
exchange for $100,000 paid in cash. On October 10, 1995 the authorized common
stock was increased to 2,000,000 shares of $.01 par value and the outstanding
shares were split 10,000 for 1. All references to shares in these financial
statements give retroactive effect to the stock split. On June 13, 1995 the
Company purchased substantially all the assets of N2K, Inc. a company engaged
primarily in computer systems consulting and its name was changed to N2K, Inc.
The purchase price was $100,000 which was allocated in accordance with fair
values as follows: Fixed Assets $30,000; Accounts Receivable $8,738; Research
and Development Costs $56,262, and Goodwill $5,000. Because computer systems
consulting is not the focus of the Company, the acquiree is not a predecessor
company.
 
     After the acquisition the Company developed an online site called Jazz
Central Station that provides a comprehensive history of Jazz. The site was
launched on the Microsoft Network on August 24, 1995 and is in beta testing on
the World Wide Web.
 
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
     [1] Use of estimates:
 
     These financial statements were prepared by management using generally
accepted accounting principles which require the use of estimates.
 
     [2] Property and equipment:
 
     Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over estimated useful lives of the assets, primarily 5
years. Upon retirement or disposition, the applicable property amounts are
relieved from the accounts, and any gain or loss is recorded in the statement of
operations. When assets become fully depreciated, the applicable asset and
accumulated depreciation amounts are relieved.
 
     [3] Goodwill:
 
     Goodwill, which represents the excess purchase price of N2K, Inc. over the
fair value of the identifiable assets acquired, is being amortized on a
straight-line basis over five years.
 
     [4] Statement of Cash Flows:
 
     Highly liquid investments with an original maturity of three months or less
are considered cash equivalents for purposes of the statement of cash flows.
 
     [5] Capital Leases:
 
     The Company capitalizes assets acquired under capital leases and records
the related capital lease obligations.
 
     [6] Income Taxes:
 
     The Company is an S corporation for Federal and State income tax purposes.
No provision for these taxes is required.
 
                                      F-23
86
 
                                   N2K, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE C -- PROPERTY AND EQUIPMENT:
 
     Property and equipment consists of the following:
Computer equipment........................................................  $249,726
    Furniture and fixtures....................................................    16,796
    Leasehold improvements....................................................    61,332
                                                                                --------
                                                                                 327,854
    Less accumulated depreciation.............................................   (16,042)
                                                                                --------
                                                                                $311,812
                                                                                ========
Included in property and equipment is property acquired under capital
leases with an aggregate cost of $196,242 and accumulated depreciation of
$9,569.
 
NOTE D -- EQUIPMENT LEASE FINANCING:
 
     The Company has a line of credit to finance its acquisition of furniture,
office and computer equipment in the amount of $350,000. Under the terms of the
master agreement, acquired assets are financed pursuant to capital leases with a
three year term and interest rate of 8.75%. At December 31, 1995 $175,424 of the
line of credit was available. The Company is also obligated under two other
capital leases with interest rates of approximately 14% and aggregating $18,167
at December 31, 1995.
 
NOTE E -- COMMITMENTS, CONTINGENCIES AND RISKS:
 
     The Company is obligated under operating and capital leases for office
space, computers and office equipment. Future annual minimum lease payments
under leases in effect at December 31, 1995 are as follows:
OPERATING    CAPITAL
                                                                 --------     --------
1996...................................................  $120,456     $ 72,233
        1997...................................................   196,088       75,795
        1998...................................................   195,356       68,132
        1999...................................................   219,550        5,522
        2000...................................................   213,155         -0 -
                                                                 --------     --------
                                                                               221,682
        Less amount representing interest......................                 28,091
                                                                              --------
        Present value of capital lease obligations.............               $193,591
                                                                              ========
The Company maintains its accounts at one institution insured by the
Federal Deposit Insurance Corporation up to a maximum of $100,000.
 
     The Company is committed to purchase furniture and equipment aggregating
approximately $125,000 which it expects to finance under the equipment lease
financing commitment described in Note D.
 
     Two of the Company's consulting customers individually accounted for 59%
and 27% of the Company's consulting revenues for the period ended December 31,
1995 and 76% and 22% of the accounts receivable at December 31, 1995.
 
NOTE F -- SUBSEQUENT EVENT:
 
     The Company merged with Telebase Systems, Inc. on February 13, 1996.
Pursuant to the merger the Company's shares were exchanged for common and
preferred shares of Telebase Systems, Inc. which changed its name to N2K Inc.
 
                                      F-24
87
 
          ------------------------------------------------------------
          ------------------------------------------------------------
     No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any of the
Underwriters or any other person. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, any security other than the
shares of Common Stock offered hereby, nor does it constitute an offer to sell,
or a solicitation of an offer to buy, any of the securities offered hereby to
any person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sales made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
                            ------------------------
                               TABLE OF CONTENTS
PAGE
                                        -----
Prospectus Summary....................     3
Risk Factors..........................     7
Use of Proceeds.......................    16
Dividend Policy.......................    16
Dilution..............................    17
Capitalization........................    18
Selected Consolidated Financial
  Information.........................    19
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................    21
Business..............................    27
Management............................    43
Certain Transactions..................    51
Principal Stockholders................    53
Description of Capital Stock..........    54
Shares Eligible for Future Sale.......    57
Underwriting..........................    58
Legal Matters.........................    59
Experts...............................    59
Additional Information................    60
Index to Consolidated Financial
  Statements..........................   F-1
------------------------
     Until               , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
 
- ------------------------------------------------------------
- ------------------------------------------------------------
 
- ------------------------------------------------------------
- ------------------------------------------------------------
 
                                2,600,000 SHARES
 
                                     [LOGO]
 
                                    N2K INC.
 
                                  COMMON STOCK
                         ------------------------------
                                   PROSPECTUS
                         ------------------------------
                                COWEN & COMPANY
                            OPPENHEIMER & CO., INC.
                                UNTERBERG HARRIS
 
                                                , 1996
 
- ------------------------------------------------------------
- ------------------------------------------------------------
88
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Common Stock offered hereby, other than underwriting discounts and commissions:
Securities and Exchange Commission.........................................   $12,372
    Nasdaq National Market Listing Fee.........................................    48,384
    NASD Filing Fee............................................................     4,088
    Blue Sky fees and expenses (including attorneys' fees).....................     *
    Accounting fees and expenses...............................................     *
    Legal fees and expenses....................................................     *
    Printing and engraving expenses............................................     *
    Transfer agent and registrar fees..........................................     *
    Miscellaneous..............................................................     *
                                                                                 --------
              Total............................................................  $
                                                                                  =======
- ------------
 
* To be completed by amendment.
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     (a) The Delaware GCL (Section 145) (i) gives Delaware corporations broad
powers to indemnify their present and former directors and officers and those of
affiliated corporations against expenses incurred in the defense of any lawsuit
to which they are made parties by reason of being or having been such directors
or officers, subject to specified conditions and exclusions; (ii) gives a
director or officer who successfully defends an action the right to be so
indemnified; and (iii) authorizes the Registrant to buy directors' and officers'
liability insurance. Such indemnification is not exclusive of any other rights
to which those indemnified may be entitled under any by-laws, agreement, vote of
stockholders or otherwise.
 
     (b) The Certificate of Incorporation of the Registrant requires, and the
Bylaws of the Registrant provide for, indemnification of directors, officers,
employees and agents to the full extent permitted by law.
 
     (c) See the Underwriting Agreement (the form of which is included as
Exhibit 1.1 to this Registration Statement) for provisions regarding the
indemnification under certain circumstances of the Registrant, its directors and
certain of its officers by the Underwriters.
 
     (d) In accordance with Section 102(b)(7) of the Delaware GCL, the
Registrant's Certificate of Incorporation provides that directors shall not be
personally liable for monetary damages for breaches of their fiduciary duty as
directors except for (1) breaches of their duty of loyalty to the Registrant or
its stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law, (3) under Section 174 of
the Delaware GCL (unlawful payment of dividends) or (4) transactions from which
a director derives an improper personal benefit.
 
                                      II-1
89
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     In September 1994, the Company issued 800,000 shares of Series D Preferred
Stock to a class of purchasers for the aggregate offering price of $1,600,000
resulting in net proceeds of $1,559,084. Such transaction was exempt from
registration under the Securities Act by virtue of Section 4(2) thereof.
 
     In December 1995, the Company issued 150,000 shares of Common Stock as
consideration in a pooling-of-interests transaction in which Advanced Research
Technologies, Inc. was merged with and into ART Acquisition Corp., a
wholly-owned subsidiary of the Company. Prior to December 31, 1995, ART
Acquisition Corp. was merged into the Company.
 
     In February 1996, the Company issued 1,797,146 shares of Common Stock and
1,347,860 shares of Series E Preferred Stock in exchange for all of the
outstanding common stock of New York N2K. The Company subsequently changed its
name to N2K Inc.
 
     In February 1996, the Company issued a warrant to Unterberg Harris to
purchase 50,000 shares of Common Stock at an exercice price of $2.40 per share
as compensation for acting as financial advisor to the Company in connection
with the Merger.
 
     In February, April and May 1996, the Company issued 4,659,200 shares of
Series E Preferred Stock (in addition to the 1,347,860 shares of Series E
Preferred Stock issued in consideration for the shares of N2K Inc.), to a class
of purchasers for the aggregate offering price of $3,727,360 resulting in net
proceeds of $3,652,360. Such transactions were exempt from registration under
the Securities Act by virtue of Section 4(2) thereof.
 
     In May and June 1996, the Company issued 5,333,333 shares of Series F
Preferred Stock to a class of purchasers for the aggregate offering price of
$16,000,000 resulting in net proceeds of $15,200,000. Such transactions were
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof.
 
     In May and June 1996, the Company issued warrants to Allen & Company
Incorporated to purchase 85,555 shares of Common Stock at an exercise price of
$9.00 per share, as compensation for acting as placement agent to the Company in
connection with the issuance of the Series F Preferred Stock.
 
     In May 1996, the Company issued 8,333 shares of Common Stock in payment to
a vendor for services rendered.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
  (a) Exhibits
EXHIBIT
     NUMBER                                       DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
1.1   -- Form of Underwriting Agreement.*
        3.1   -- Form of Certificate of Incorporation of the Registrant, as amended.
        3.2   -- Form of Bylaws of the Registrant, as amended.
        4.1   -- Specimen of Certificate for Common Stock.*
        4.2   -- 1987 Employee Incentive Stock Option Plan of the Company.
        4.3   -- Amended and Restated 1996 Stock Option Plan of the Company.*
        4.4   -- 1996 Employee Stock Purchase Plan.*
        4.5   -- Note Purchase Agreement dated October 30, 1987 between the Company and Gary
                 M. Lauder.
        4.6   -- Form of Series A Preferred Stock Purchase Agreement.
        4.7   -- Form of Series C Preferred Stock Purchase Agreement.
        4.8   -- Form of Series D Preferred Stock Purchase Agreement.
        4.9   -- Form of Series E Preferred Stock Purchase Agreement.
        4.10  -- Form of Series F Preferred Stock Purchase Agreement.
        4.11  -- Registration Rights Agreement dated as of February 13, 1996 among the Company
                 and the stockholders of New York N2K.
        4.12  -- Warrant Agreement dated as of February 13, 1996 between N2K Inc. and
                 Unterberg Harris.
II-2
90
EXHIBIT
     NUMBER                                       DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
5.1   -- Opinion of Dewey Ballantine.*
        10.1  -- Employment Agreement effective as of February 13, 1996 between the Company
                 and Lawrence L. Rosen.
        10.2  -- Employment Agreement effective as of February 13, 1996 between the Company
                 and Jonathan V. Diamond.
        10.3  -- Employment Agreement effective as of February 13, 1996 between the Company
                 and Robert David Grusin.
        10.4  -- Employment Agreement dated as of May 1, 1987 between the Company and
                 James E. Coane.
        10.5  -- Employment Agreement dated as of February 8, 1988 between the Company and
                 Bruce Johnson.
        10.6  -- Agreement re: Revolving Line of Credit with CoreStates Bank, N.A. (f.k.a.
                 Meridian Bank).*
        10.7  -- Letter Agreement dated June 3, 1996 between the Company and Rocktropolis
                 Enterprises, LLC.
        10.8  -- Lease Agreement dated April 26, 1991 between the Company and Bebob
                 Associates, as amended.
        10.9  -- Lease Agreement dated September 7, 1995 between New York N2K and 55 Broad
                 Street Company, as amended.
        10.10 -- Agreement dated November 4, 1985 between the Company and CompuServe, as
                 amended.+
        10.11 -- Distributorship Agreement dated August 1, 1992 between the Company and Nifty
                 Corporation.+
        10.12 -- Discount Agreement dated January 25, 1995 between the Company and
                 Knight-Ridder Information, Inc.+
        10.13 -- Small Order Fulfillment Agreement between the Company and Valley Record
                 Distributors.+
        10.14 -- Indemnification Agreement dated as of February 13, 1996 among the Company and
                 the stockholders of New York N2K.
        11.1  -- Statement re: Computation of Per Share Earnings.
        21.1  -- Subsidiaries of the Registrant.
        23.1  -- Consent of Arthur Andersen LLP.
        23.2  -- Consent of Richard A. Eisner & Company, LLP.
        23.3  -- Consent of Dewey Ballantine (contained in Exhibit 5.1).*
        24.1  -- Power(s) of Attorney (included on signature page).
        27    -- Financial Data Schedule.
- ---------------
* To be filed by amendment.
+ Confidential treatment will be requested.
 
  (b) Financial Statement Schedules
      None
 
ITEM 17.  UNDERTAKINGS
 
     The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any
 
                                      II-3
91
 
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
 
     The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities Act
     of 1933, the information omitted from the form of prospectus filed as part
     of this registration statement in reliance upon Rule 430A and contained in
     a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     registration statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act of 1933, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new registration statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.
 
                                      II-4
92
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York, on June 20, 1996.
 
                                          N2K INC.
 
                                               By     /s/  LAWRENCE L. ROSEN
                                                      Lawrence L. Rosen,
                                               Chairman of the Board and Chief
                                                        Executive Officer
 
                               POWER OF ATTORNEY
 
     Know All Men By These Presents that each person whose signature appears
below under the heading "Signature" constitutes and appoints Jonathan V. Diamond
and Bruce Johnson his true and lawful attorneys-in-fact and agents, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
to this Registration Statement, including post-effective amendments, and to file
the same, with all exhibits thereto, and all documents in connection therewith,
including, without limitation, any registration statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorneys-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 20th day of June, 1996.
SIGNATURE                                         TITLE
- ---------------------------------------------    --------------------------------------------
/s/  LAWRENCE L.             Chairman of the Board,
                     ROSEN                         Chief Executive Officer and Director
              Lawrence L. Rosen                    (Principal Executive Officer)
                    /S/  Jonathan V.             Vice Chairman and Director
                    Diamond
             Jonathan V. Diamond
               /s/  ROBERT DAVID GRUSIN          Vice Chairman and Director
             Robert David Grusin
                       /s/  JAMES E.             President, Chief Operating Officer and
                     COANE                         Director
               James E. Coane
                        /s/  BRUCE               Vice President, Secretary and Chief
                    JOHNSON                        Financial Officer (Principal Accounting
                Bruce Johnson                      Officer and Principal Financial Officer)
                      /s/  ROBERT C.             Director
                    HARRIS
            Robert C. Harris, Jr.
                  /s/  SUSANNE HARRISON          Director
              Susanne Harrison
II-5
93
 
                                 EXHIBITS INDEX
EXHIBIT
     NUMBER                                 DESCRIPTION                                 FILED
- ----------------  ---------------------------------------------------------------    -----------
1.1   --  Form of Underwriting Agreement.*...............................
        3.1   --  Form of Certificate of Incorporation of the Registrant, as
                  amended........................................................     Electronic
        3.2   --  Form of Bylaws of the Registrant, as amended...................     Electronic
        4.1   --  Specimen of Certificate for Common Stock.*.....................
        4.2   --  1987 Employee Incentive Stock Option Plan of the Company.......     Electronic
        4.3   --  1996 Stock Option Plan of the Company.*........................
        4.4   --  1996 Employee Stock Purchase Plan.*............................
        4.5   --  Note Purchase Agreement dated October 30, 1987 between the
                  Company and Gary M. Lauder.....................................     Electronic
        4.6   --  Form of Series A Preferred Stock Purchase Agreement............     Electronic
        4.7   --  Form of Series C Preferred Stock Purchase Agreement............     Electronic
        4.8   --  Form of Series D Preferred Stock Purchase Agreement............     Electronic
        4.9   --  Form of Series E Preferred Stock Purchase Agreement............     Electronic
        4.10  --  Form of Series F Preferred Stock Purchase Agreement............     Electronic
        4.11  --  Registration Rights Agreement dated as of February 13, 1996
                  among the Company and the Stockholders of New York N2K.........     Electronic
        4.12  --  Warrant Agreement dated as of February 13, 1996 between N2K
                  Inc.
                  and Unterberg Harris...........................................     Electronic
        5.1   --  Opinion of Dewey Ballantine.*..................................
        10.1  --  Employment Agreement effective as of February 13, 1996 between
                  the Company and Lawrence L. Rosen..............................     Electronic
        10.2  --  Employment Agreement effective as of February 13, 1996 between
                  the Company and Jonathan V. Diamond............................     Electronic
        10.3  --  Employment Agreement effective as of February 13, 1996 between
                  the Company and Robert David Grusin............................     Electronic
        10.4  --  Employment Agreement dated as of May 1, 1987 between the
                  Company
                  and James E. Coane.............................................     Electronic
        10.5  --  Employment Agreement dated as of February 8, 1988 between the
                  Company and Bruce Johnson......................................     Electronic
        10.6  --  Agreement re: Revolving Line of Credit with CoreStates Bank,
                  N.A. (f.k.a. Meridian Bank).*..................................
        10.7  --  Letter Agreement dated June 3, 1996 between the Company and
                  Rocktropolis Enterprises, LLC..................................     Electronic
        10.8  --  Lease Agreement dated April 26, 1991 between the Company and
                  Bebob Associates, as amended...................................     Electronic
        10.9  --  Lease Agreement dated September 7, 1995 between New York N2K
                  and 55 Broad Street Company....................................     Electronic
        10.10 --  Agreement dated November 4, 1985 between the Company and
                  CompuServe, as amended.+.......................................     Electronic
        10.11 --  Distributorship Agreement dated August 1, 1992 between the
                  Company and Nifty Corporation.+................................     Electronic
        10.12 --  Discount Agreement dated January 25, 1995 between the Company
                  and Knight-Ridder Information, Inc.+...........................     Electronic
        10.13 --  Small Order Fulfillment Agreement between the Company and
                  Valley Record Distributors.+...................................     Electronic
94
EXHIBIT
     NUMBER                                 DESCRIPTION                                 FILED
- ----------------  ---------------------------------------------------------------    -----------
10.14 --  Indemnification Agreement dated as of February 13, 1996 among
                  the Company and the stockholders of New York N2K...............     Electronic
        11.1  --  Statement re: Computation of Per Share Earnings................     Electronic
        21.1  --  Subsidiaries of the Registrant.................................     Electronic
        23.1  --  Consent of Arthur Andersen LLP.................................     Electronic
        23.2  --  Consent of Richard A. Eisner & Company, LLP....................     Electronic
        23.3  --  Consent of Dewey Ballantine (contained in Exhibit 5.1).*.......
        24.1  --  Power(s) of Attorney (included on signature page)..............     Electronic
        27    --  Financial Data Schedule........................................     Electronic
- ---------------
 
* To be filed by amendment.
+ Confidential treatment will be requested.