Yes, it is illegal to distribute copyrighted material over the internet, unless the copyright holder has given his/her permission to distribute that material for free. Game demos are another matter, since a Demo does not represent the final product. However, I don't know what the current legislation says about console game demos in a CD image format though.
If you've made a demo of a game or some other work and want to share it with everybody, go ahead. You are the copyright holder after all.