The judge dismissed as "overstated" accusations that Kazaa's owners were infringing copyright themselves.
"The more realistic claim is that the respondents authorised users to infringe the applicants' copyright in their sound recordings," he said.
Kazaa's owners were ordered to modify the software within two months to include filters designed to stop the sharing of copyright material.
A fresh round of hearings will now be held to determine the level of damages, which could run into the millions of dollars.
Kim Weatherall, who has done the most comprehensive analysis of the decision that I've seen so far, reckons the judge has been "brave" in insisting that Sharman attempt to implement some kind of filtering process to cut copyright infringement. "Brave" because this will mean in practice a constant series of hearings where Sharman and the record companies complain about how each party is not doing enough (just like the Napster case in the US). She's probably right.