I saw a method for setting up a site to watch movies online for free but is it illegal to do so?
The method revolves around finding the movies that others have already posted online to sites like megavideo.com, dailymotion.com, etc. Then you either embed the video player on a page or give them a link to the movie on the actual site. You do not host the movie or upload the movie to any site yourself, just simply find it and promote it.

If I go through with this can I get in trouble for having a site like this even if I don't upload the movie or host the movie myself?

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its a grey area, the guy who ran tv-links.com or whatever it was got done for it, and all he did was link to other places and not even embed them on his site,

Well strictly speaking its illegal because you are furthering the commission of a crime.
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it is some what illegal but since it's not hosted on your site if you get caught they most likely won't do anything to you.

Thanks for the feedback. I was kind of considering it but I don't want to take a chance on getting busted and going through the legal hassles or end up being some guys bitch! lol.
There are plenty of other ways to make more money online without having to constantly look over my shoulder.

I used to do this in my blogspot blog. It has huge amount of traffic and I rose up to PR3. But now I don't know. My new posts are not being indexed by google anymore

Basically you're distributing copyrighted works w/o the owner of the works getting compensation for it. The fact that you're not hosting the file or uploading it isn't relevant - it's illegal. If you don't beleive it, just read the entire FBI warning on a movie dvd.

I see a lot of sites that do this.. but maybe it would safer if your site is hosted offshore...

Personally I don't think it would be worth the risk!! look at those torrent sites, even thought the files are not hosted on their servers a lot of them are getting sued, and your are right, it would really be a big headache if you had a lawsuit on your hands..

Well thats good to know, I'm moving my movie sites offshore, they do ok, but I want to ramp them up soon and rather not have fbi up off in my grill

Something maybe in china...