The most significant legal fact about inline linking, relative to copyright law considerations, is that the inline linker does not place a copy of the image file on its own Internet server. Rather, the inline linker places a pointer on its Internet server that points to the server on which the proprietor of the image has placed the image file. This pointer causes a user's browser to jump to the proprietor's server and fetch the image file to the user's computer. US courts have considered this a decisive fact in copyright analysis. Thus, in Perfect 10, Inc. v. Amazon.com, Inc.,[5] the United States Court of Appeals for the Ninth Circuit explained why inline linking did not violate US copyright law:
Google does not...display a copy of full-size infringing photographic images for purposes of the Copyright Act when Google frames in-line linked images that appear on a user’s computer screen. Because Google’s computers do not store the photographic images, Google does not have a copy of the images for purposes of the Copyright Act. In other words, Google does not have any “material objects...in which a work is fixed...and from which the work can be perceived, reproduced, or otherwise communicated” and thus cannot communicate a copy. Instead of communicating a copy of the image, Google provides HTML instructions that direct a user’s browser to a website publisher’s computer that stores the full-size photographic image. Providing these HTML instructions is not equivalent to showing a copy. First, the HTML instructions are lines of text, not a photographic image. Second, HTML instructions do not themselves cause infringing images to appear on the user’s computer screen. The HTML merely gives the address of the image to the user’s browser. The browser then interacts with the computer that stores the infringing image. It is this interaction that causes an infringing image to appear on the user’s computer screen. Google may facilitate the user’s access to infringing images. However, such assistance raised only contributory liability issues and does not constitute direct infringement of the copyright owner’s display rights. ...While in-line linking and framing may cause some computer users to believe they are viewing a single Google webpage, the Copyright Act...does not protect a copyright holder against [such] acts....
http://en.wikipedia.org/wiki/Inline_linking