NEW YORK (Reuters) - Napster Inc. said on Monday it filed for bankruptcy protection, as German media giant Bertelsmann AG prepares to take over what remains of the once dominant Internet music-swapping service.

The filing is part of the survival plan for three-year-old Napster, which became one of the Internet's hottest properties by letting millions of people swap music online for free.

"They're still not dead," said P.J. McNealy, research director at Gartner/G2, a San Jose, California-based technology research firm. "Napster will continue to hope that at some point down the road, it can leverage whatever value its brand still has left."

At its peak, Napster attracted nearly 60 million users. The music quickly died, though, as five big record labels sued the company for music piracy. Napster has been offline since July.

"It still holds a sense of promise of being a universal jukebox," said Steve Jones, who heads the communications department at the University of Illinois at Chicago.

Closely held Napster, based in Redwood City, California, listed $7.9 million in assets and about $101 million of debts as of April 30, in papers filed with its voluntary Chapter 11 petition at the U.S. Bankruptcy Court in Delaware.

"Today's filing marks a new beginning for Napster," Chief Executive Konrad Hilbers, who joined the company from Bertelsmann last July, said in a press statement. "The demand for an Internet-based music file sharing community that benefits artists and consumers is as strong as ever."

A Napster spokeswoman declined to say when the company expects to emerge from bankruptcy. Napster's lawyers did not immediately return calls seeking comment.

CASH VANISHES

Analysts said it might have cost $30 million to buy Napster outright. Chief Financial Officer Carolyn Jensen said in a court filing the company agreed to the Bertelsmann purchase to "maximize value for all ... stakeholders" and avoid having to liquidate.

"The extraordinary costs associated with developing the New Napster Pay Service and defending against the Prepetition Lawsuits have depleted (Napster's) available cash reserves," and could have forced Napster to close by June, Jensen said in the court filing.

Napster suffered a setback in March when a federal appeals court in San Francisco ordered it to remain shut until it complied with an injunction to remove all copyrighted music.

The company failed to find enough backing to relaunch as a royalty-paying service.

Napster now has about 18 employees, court papers show, down from about 100 earlier this year.

Bertelsmann [BERT.UL], which is owed $91 million by Napster, stepped in on May 17 with $8 million to buy Napster's assets and assume certain liabilities, court papers show.

Under the Bertelsmann agreement, Napster was to seek bankruptcy protection and emerge as a wholly owned unit of Europe's No. 2 media group. The agreement requires court approval, and another buyer may bid more at auction.

Napster is seeking $5.125 million of debtor-in-possession financing from Bertelsmann, which helps the company operate during bankruptcy, court papers show.

"The name Napster can be revived, but it would take more than Bertelsmann alone," said Jones. "It requires the agreement of major labels to get Napster up and running the way it was."

Bertelsmann declined to comment.

ANGRY AT NAPSTER

Hilbers had resigned on May 14 after Napster failed to find funding to relaunch its service. He returned three days later when Bertelsmann offered the buyout.

Shawn Fanning, who founded Napster as a college student in 1999, will be the company's chief technology officer.

The big record labels that fought Napster in court starting in December 1999 include AOL Time Warner Inc.'s AOL.N Warner Music, Bertelsmann's BMG, EMI Group Plc EMI.L , Sony Music 6758.T and Vivendi Universal's EAUG.PA Universal Music.

"There remains much anger toward Napster" from those labels, said McNealy. "I don't see any replacement any time soon because labels have been hesitant to experiment with their business models. Piracy continues to thrive."

Napster listed The Association of Independent Music of London, which it said is owed $3.79 million, as its largest unsecured creditor, followed by the law firm of Boies, Schiller & Flexner LLP, with $2.14 million, court papers show.