UMmm im pretty sure its not...i mean the last anime convention i was at, had a AMV contest...

In technical terms, Yes it is. Both the song and the videos clips your using will (or most likely will be) copyrighted by the owners, so unless you have their permission to use it it's copyright theft and illegal. On the other hand, it doesn't seem to be that the animé distributors/creators seem to be concentration on at the moment (that's still on the torrents) but the music industry certainly do. "Anime Music Videos" have been issued a cease & desist order on some of the AMV's they list due to the record company finding out they were using songs by some of their artists.

It is "illegal" but the law is currently not enforced very well.

it kinda is cuz y would they make somin like veoh were itz like 4 amvs if it wuz illegal

To make? Yes, as long as you own the song and anime on a disc or other medium. Legal to proliferate around the internet? As legal as 80% of the stuff on YouTube.

"In certain jurisdictions, the making of AMVs may be permissible under fair use provisions. Distribution of AMVs is not likely to be protected by fair use provisions as any distribution is likely to constitute public use, whereas fair use is generally restricted to personal use. AMVs inherently consist entirely of copyrighted and unlicensed material, including entire songs and substantial portions of television series or motion pictures. Thus, legal concerns vary depending on several factors. As a general rule of thumb AMVs can be seen as illegal in the de jure sense, however, legalities concerning copyrights are subject to variation based on the copyright holders' consent. Many AMVs have so far been viewed as acceptable under fair use provisions or have otherwise gone legally unmolested, implying (albeit potentially falsely) a de facto legal validity. The Japanese culture is generally permissive with regard to the appropriation of ideas. Works such as doujinshi, unauthorized comics continuing the story of an official comic series, are actually encouraged by many anime makers. These doujinshi take an original copyrighted work and expand upon the story, allowing the characters to continue on after, before, or during the original story. Most anime makers encourage this practice, as it expands their series. Some see it as a tribute, others see it from a business viewpoint, that it draws in more support for the anime than it would have had otherwise. Some mangaka create their own doujinshi, such as Maki Murakami's "circle" Crocadile Ave (Gravitation (manga))." Source and further information: http://en.wikipedia.org/wiki/AMV#AMV_and_copyright_infringement

actually it ain't like tat. sure the footage gets ripped but they own tha dvd in the first place and 2nd ... it is like fanart in which they make vids 'bout their fav animes and since it is kinda like fanart ......then yea the "directors" aren't doing this illegally

Technically is the same as having MP3 in your own PC without sharing them, you aren't going to make money with them and the owners make them just for our and their fun.

It is illegal but much like the Dojinshi, it's not cracked down upon by law enforcement.