This is what I read somewhere
Kazaa is leagal, the reason Kazaa is legal is because of a 'landmark' case Sony won in the early 80s. Sony's case was film companies were trying to sue because Sony were making Video machines that had record buttons, the film companies said that because Sony supplied record buttons making it possible to record films from the TV then they were encouraging Video Piracy and therefore Sony were at fault and would have to pay -it's easier to go after the large corperation than it is to go after individuals.
Now Sharman networks (who created Kazaa) are hiding behind that same loophole, just because they created a technoogy that would enable illegal file sharing doesn't mean that they are guilty of encouraging Piracy. (Many people say Bit Torrent is illegal yet companies use it for cheap distribution of software).
so, Kazaa is not illegal.
sharing and downloading copyrighted material (without paying the license holder) is illegal.