SETTLEMENT AND REIMBURSEMENT AGREEMENT AND RELEASE

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              This Settlement and Reimbursement Agreement and Release

("Agreement") is entered into as of January 1, 2003, between and among MM

Companies, Inc. ("MM"), Liquid Audio, Inc. ("Liquid Audio"), Raymond A. Doig,

Gerald W. Kearby, Robert G. Flynn, Stephen V. Imbler and Ann Winblad (the

"Individual Defendants", and with Liquid Audio, the "Defendants").



              WHEREAS, on May 3, 2002 MM commenced an action in the Court of

Chancery of the State of Delaware seeking to compel Liquid Audio to hold its

annual meeting of stockholders and on May 30, 2002, MM commenced an action in

the Court of Chancery of the State of Delaware seeking inspection of stockholder

records of Liquid Audio (collectively, the "Meeting Litigation");



              WHEREAS, on July 23, 2002 MM commenced an individual action in the

Court of Chancery of the State of Delaware alleging breaches of fiduciary duty

by the Individual Defendants, challenging a proposed merger agreement between

Liquid Audio and Alliance Entertainment Corp. and alleging that Alliance aided

and abetted the purported breaches of fiduciary duties, captioned MM COMPANIES,

INC. V. LIQUID AUDIO, INC., ET AL., Del. Ch., C.A. No. 19773 (the "Fiduciary

Duty Action"), which was dismissed without prejudice by MM on December 12, 2002;



              WHEREAS, on August 20, 2002 Liquid Audio commenced an action in

the U.S. District Court for the Southern District of New York against MM and

Steel Partners II, L.P., alleging violations of the Investment Company Act, and

various provisions of the Securities Exchange Act captioned LIQUID AUDIO, INC.

V. MM COMPANIES, INC. ET AL., C.A. No. 02 Civ. 6649 (the "New York Action");

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              WHEREAS, MM solicited proxies in respect of various proposals

presented at Liquid Audio's 2002 Annual Meeting of Stockholders (the "Meeting")

held on September 26, 2002 (the "Solicitation");



              WHEREAS, as a result of the Solicitation, two nominees of MM were

elected as directors by the stockholders at the Meeting;



              WHEREAS, MM and Defendants desire to avoid the hazards,

uncertainties, and expense of continued litigation between themselves and have

agreed to settle and dismiss the Fiduciary Duty Action and the New York Action

upon the terms and conditions set forth in this Agreement.



              NOW, THEREFORE, in consideration of the mutual promises, pledges,

covenants, and agreements contained herein and for other good and valuable

consideration, the parties hereto, intending to be legally bound, agree as

follows:



              1. DISMISSAL OF THE FIDUCIARY DUTY ACTION: The parties hereby

stipulate that the prior dismissal of the Fiduciary Duty Action shall be deemed

to have been with prejudice, and the parties, through their counsel, shall

execute any further documents appropriate to confirm this stipulation.



              2. DISMISSAL OF THE NEW YORK ACTION: Not later than two (2)

business days after the execution of this Agreement the parties, through their

respective counsel, shall take such steps as are necessary to obtain a dismissal

(with prejudice) of the New York Action, including submitting to the U.S.

District Court for the Southern District of New York a stipulation and order of

dismissal.



              3. PAYMENT TO MM: Within two (2) business days after the dismissal

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