Technically, it's illegal in the US. But quite a few people do it. If they tried to prosecute everyone who did it, the jails would be rather full. I've never heard of anyone going to jail for using game images, though I have heard of people getting in trouble for hosting them. Even then, it's usually just a fine or (in some cases) a warning. There are countries where IP is not protected, however, and in those countries it's legal. Seeing as the web isn't region-locked... that means people are going to find material that local laws prohibit.
I think that in the future, they're going to enforce the restrictions by designing games and systems in such a way that it would be difficult for the typical home computer to emulate them. The Wii is already fairly close to this ideal, and I think future systems will push even closer to being so convoluted and monitored that no one will be able to emulate them easily or perfectly.
All they really need is to put the systems online, and require you to authenticate your game with Nintendo every time you play. Ideally, you wouldn't even get a physical disk... the content would be streamed, kept on a system with no kind of permanent storage, and have to be downloaded fresh from their servers every time. Eventually, the technology will permit that. It's closer than you think.
Still, I wouldn't advertise the fact that you use emulators on the Internet... just in case, you know what I mean?