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                                                                   Exhibit 10.1



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                                       January 17, 2003


Jennifer Sylva, Esq.
General Counsel
Liquid Audio, Inc.
800 Chesapeake Drive
Redwood City, California 94063


     Re:  BeMusic, Inc. v. Liquid Audio, Inc., et al.
          Civil Action No. 20083-NC, Court of Chancery
          New Castle County, Delaware


Dear Ms. Sylva:

     At the request of Raymond Doig, the chief executive officer of Liquid
Audio, Inc. ("Liquid"), I submit on behalf of BeMusic, Inc. ("BeMusic"),
without prejudice, the following proposal for the settlement of the above
referenced litigation (the "Delaware Action"):

     A.   Liquid will represent, covenant and agree in writing that it will set
          aside a cash reserve ("Liquid's Defense Reserve") of $2,000,000, to
          pay 50% of CDnow Online, Inc.'s reasonable attorneys' fees and costs
          (excluding any fees attributable to in-house counsel of CDnow Online,
          Inc. ("CDnow") or BeMusic) in defending a patent action ("CDnow's
          Defense"), brought by SightSound, Inc. ("SightSound") against CDnow,
          styled SightSound.Com. Inc. v. N2K, Inc., et al., C.A. No. 98-CV-118,
          which is presently pending in the United States District Court for the
          Western District of Pennsylvania (the "Patent Litigation"). Liquid
          will maintain Liquid's Defense Reserve (less amounts actually spent on
          CDnow's Defense after the date of settlement of the Delaware Action)
          until the Patent Litigation is finally resolved by settlement or a
          final order or judgment that (i) is affirmed by the highest court to
          which an appeal may be taken or (ii) can no longer be appealed ("Final
          Resolution of the Patent Litigation").


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Liquid Audio, Inc.
January 17, 2003
Page 2


     B.   Liquid will represent, covenant and agree in writing that Liquid will
          (a) set aside and maintain a $5,000,000 cash reserve (the
          "Indemnification Reserve") until the earlier of (i) the Final
          Resolution of the Patent Litigation, or (ii) the entry by a court of a
          final order determining that Liquid does not have an obligation to
          indemnify CDnow with regard to an adverse judgment (an "Adverse
          Judgment") rendered against CDnow in the Patent Litigation; and (b)
          subject to Paragraph D below and the final sentence of this Paragraph
          B, to the extent obligated to do so, Liquid shall apply the
          Indemnification Reserve (or so much of it as is required) towards the
          satisfaction of the Adverse Judgment. By entering into this Settlement
          Agreement, Liquid does not agree, concede, or intend to suggest that
          it has any obligation to indemnify CDnow with regard to an Adverse
          Judgement, and Liquid specifically reserves its right to assert that
          it has no such obligation.

     C.   The parties acknowledge and agree that each of their respective
          interests would best be served by a swift and timely resolution of the
          Patent Litigation. Therefore, commencing immediately upon the
          execution of this Settlement Agreement, the parties shall work
          together in good faith and shall use commercially reasonable efforts
          to attempt to settle the Patent Litigation.

     D.   Within five (5) business days following the execution of this
          Settlement Agreement by both parties hereto, the Delaware Action
          (including Liquid's counterclaim (the "Counterclaim") asserted
          therein) will be dismissed, with prejudice, with each side to bear its
          own attorneys' fees and costs.

     E.   This settlement will be without prejudice to any claim or defense that
          either CDnow or Liquid has concerning Liquid's purported
          Indemnification Obligation, and either party may at any time commence
          an action (including a declaratory judgment action) seeking relief
          with respect thereto.

     F.   This Settlement Agreement shall be governed by the law of Delaware,
          exclusive of its conflict of law provisions, and both parties agree to
          submit to the jurisdiction of the State or Federal Courts of Delaware
          in connection with any litigation to construe or enforce this
          agreement.



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Liquid Audio, Inc.
January 17, 2003
Page 3


     G.   This Settlement Agreement and all negotiations, documents, statements,
          transactions, and proceedings in connection therewith shall not
          constitute or be construed to be, or used in any civil, criminal, or
          administrative proceedings or actions, as evidence of an admission or
          concession on the part of any of the parties with respect to any claim
          of wrongdoing or liability asserted by or against them.

     H.   By signing or countersigning this letter, you and I represent that we
          each have the authority, from BeMusic and Liquid respectively, to
          enter into this Settlement Agreement.


     If Liquid agrees to this settlement proposal, please date and countersign
this letter and return it to me by fax.

                                       Very truly yours,

                                       /s/ Clifton B. Knight, Jr.
                                       --------------------------
                                       Clifton B. Knight, Jr.



ACCEPTED AND AGREED TO
THIS 17TH DAY OF JANUARY, 2003

/s/ Raymond A. Doig
--------------------------
Raymond A. Doig
CEO
Liquid Audio, Inc.



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