Sharman Networks, which produced and distributed the software, settled global legal actions brought against it by Universal Music, Sony BMG, EMI and Warner Music on Thursday.
The software made it simple for users to download music and films free.
John Kennedy, of International Federation of the Phonographic Industry, said: "There are very substantial damages being paid - in excess of $100 million - and Kazaa will go legal immediately."
The company also promised to "use all reasonable means" to discourage online piracy.
Kazaa would build into its software ways to frustrate computer users who try to download copyrighted music and films, court papers said
Mitch Bainwol, head of the Recording Industry Association of America, the trade group for the largest music businesses, said: "Services based on theft are going legit or going under, and a legal marketplace is showing real promise."
Sharman Networks indicated that it would negotiate licences with entertainment companies to distribute music and movies lawfully via Kazaa, similar to Apple's iTunes service.
The Supreme Court ruled last year that the entertainment industry can file piracy lawsuits against technology companies caught encouraging customers to steal music and films over the internet.