File-sharing is not illegal. A few friends sharing files online between themselves is no more illegal than them swapping CDs or DVDs. Confusion arises regarding the scale of sharing and what kind of money is involved. At what scale of sharing does it become illegal, rather than just people swapping their belongings.
It is certainly illegal when individuals, or even companies, download material using p2p software in order to create CDs and DVDs for sale in the same way that is was illegal for these same people to copy audio tapes for sale. That is understandable and nobody could realistically condone such behavior. It is not illegal, however, for you to allow others to copy files from your computer as long as you are not doing so for gain. If these files are copyrighted, it is illegal for the copier to copy them.
There appears to have been a distinction made between downloading other files and swapping their physical hardware. In other words, you can give your friend your Elton John album in exchange for his Prodigy album, but not for you to download a copy of his album, and he yours.
Perhaps rightly so, and I believe most would agree were it not for the double standards being operated, and the lack of firm direction on behalf of the artists themselves. Artists, who are more than happy to have their work downloaded by interested listeners or viewers when they are trying to make their name, often take the opposite view once these same fans have promoted them to the position that they desired. Once they become rich they can afford superstar lawyers to get them more money so they do not have to work anymore.
Court cases have been sending out mixed signals over the years, though it is a fact that breaking of copyright is illegal. P2P file sharing is not illegal as long as the files being shared are not copyrighted. People do not tend to share files that do not already carry some kind of copyright though. The vast majority of P2P software is being used illegally, but if you consider the number of downloads compared to those actually prosecuted, you have a higher chance of being killed by a coconut falling on your head than you have of being prosecuted for an illegal download.
Just avoid making a business of recording the files onto disks and selling them. People that do that are the main targets of the music and video companies, though it is true that a few high school kids have also been fined. They are by far in the minority though. Be smart and reduce your risk by downloading more than you upload.