Sharman Networks, owner of the Kazaa P2P program, said Thursday that it had reached a settlement with the record industry that would immediately drop all pending litigation against the company. Sharman will also pay the industry more than $100 million and immediately go legal as a result of the agreement.

Filtering technologies will be introduced on the P2P service that will make it impossible to share illicit files. Kazaa's P2P technology would now only be used to trade legal files, the two sides said. Record industry advocates hailed the agreement, while Sharman said the distribution deal was a long standing goal of the company.

"This is the best possible outcome for the music industry and consumers. Our industry will have a new business partner and consumers will experience new ways of enjoying music online, with more choice," British record industry consortium IFPI CEO John Kennedy said. "This is a win-win scenario."

Sharman had hoped to create a system several years ago that would have allowed it to sell licensed tracks, however talks between the two sides fell apart. In an Australian case against the company, record industry lawyers said that afterwards Sharman became even more intent on spreading its software, creating a "copyright piracy engine."

While the record industry cast Kazaa mostly in a negative light in its remarks announcing the settlement, Sharman chose to accentuate the positives, saying it legitimized P2P as a download medium for digital content.

"All the parties involved now recognize the time is right to work together, and we are looking forward to collaborating with the music and motion picture companies to make P2P an integral part of the future of online digital entertainment," Sharman CEO Nikki Hemming said.

Supporters of P2P said that the settlement was welcome news, and claimed it would help the industry grow further. P2P Interest group The Distributed Computing Industry Association said that digital rights management systems have been proven to work in a peer-to-peer sharing environment.

"The Kazaa settlements should help advance commercial development of the P2P distribution channel," DCIA CEO Marty Lafferty. "Such conflict resolution represents a positive step for industry growth, removing an impediment to progress towards realizing the full potential of file-sharing technologies."

The DCIA represents some 80 members, consisting of peer-to-peer software providers, content rights holders and service-and-support companies.

But JupiterResearch analyst Mark Mulligan says the settlement is about two years too late, noting that Kazaa's reputation has been severely damaged through the legal wrangling and spyware issues that have plagued the company.

"it is questionable just how useful and large this new audience will be and also there are concerns about what such an association will do to the reputation of the music industry," he said.