Legal Music Trading Group
There are a number of sites providing legal downloads of music which is licensed to encourage copying. Instead of trading tracks from our existing collection of extremely copyrighted CDs and downloads, we each go out trawling the various sites dedicated to freely-tradeable music, find the best of that stuff, and use it to create mix CDs. (I have to give Thorog credit for the original idea of getting a bunch of people to fill up a pre-designated space with MP3 tracks, and then burning the results as CDs and distributing them... possibly for a small fee to cover materials and postage.)
This has the advantage of giving some "ear time" to some seriously overlooked artists and hopefully finding some overlooked tracks, rather than rewarding the monopolistic traditional-license record labels for their possessiveness and unwillingness to change.
It can also be kept legal as it scales up; Magnatune, for example, lets you instantly license tracks for small-quantity reproduction. They also allow you to legally give away three copies of tracks you've purchased. So once the group starts to get to be more than a handful of people, you could purchase a license for any Magnatune tracks you wanted and legally sell the CDs on which you included them, with a small markup to cover burning costs, and of course adding on for shipping costs. (We'd have to see how the economics worked out once we actually had some track selections to get prices for; it may be that Magnatune is charging too much to make the resulting CDs affordable, but it's definitely worth the experimentation to find this out, in my view. Magnatune and others are still largely testing the waters, and I suspect that they'd be very interested in hearing our feedback.)
Once you get to the point of having a handful of handfuls of people, it starts becoming worthwhile to set up a web site to help people find groups with similar tastes. It can start simply, however, with just a few people in a chat room agreeing to participate, with no formal structure needed.