IMO this is a good appropriation of the material in the spirit of "rhyming and stealing" that both hip-hop and the demo scene spawn from. Yes, the demo scene artist got screwed over. But, if Timabland is scouring the internet for .SID files I'm pretty sure it would not have been unfeasible to contact him directly and ask what's up?

Music, and the way it's traditionally been practiced (I have sort of a folk music and demo scene cultural background, and they are remarkably similar) doesn't necessarily fit that well with current law. The important thing here is to note that musicians generally work these things out anyway. If you use music without giving credit, then you're a jerk and other musicians will let people know that.

But any culture has different ways of doing it, and different definitions of what they think is plagiarism and being a jerk. So when hip hop culture meets demo scene culture, it's no surprise that things don't agree. I'm no expert on the former, but I would guess that obscure enough is fair game, and Timbaland might not even know who made it, or even realize that there is a person on the other end expecting some recognition for his work.

So like other posters have said, they should talk. Bringing up lawsuits and "oh, but downloading is ok?" just has nothing to do with this.