The report said the firm would also offer licensed entertainment for a price, and it agreed to pay more than $115 million in penalties to leading music and movie companies.
The settlement ended one of the longest-running and fiercest copyright disputes of the Internet era, in which the entertainment industry spent millions suing Sharman Networks and the company's customers to end the illegal trade of its products, the report said.
Sharman Networks pledged to "use all reasonable means" to discourage online piracy, including building into new versions of its software "robust and secure" ways to frustrate computer users trying to find and download copyrighted music and movies, court papers said.
Kazaa's popularity had declined dramatically in recent years amid concerns over "spyware" monitoring programs bundled with its freely distributed software and as new, more efficient downloading services, both legal and illegal, emerged.
The settlement included payment of $115 million to music companies and a lesser amount to the movie industry, said people familiar with those provisions, according to the report.