Yeah, but as much as corporations like to pretend otherwise, their word isn't law just yet.
I guess it really depends on your definition of what illegal means. When I see people use the term 'illegal' I tend to assume they're talking about something being criminal. Even with the definition of 'anything that is not expressly permitted under the law,' MMO server emulation isn't illegal.
There are basically four avenues of attack to block server emulation:
1.) The EULA. Courts almost never find in favor of a software company for EULA violations because they are not presented to the customer at point-of-sale (as a condition of sale). They also violate the first-sale doctrine. EULAs tend to be upheld more in the United States than anywhere else, which is to say almost never. Regardless, legally this would mean a breach of contract which is not criminal. The only policeman knocking on your door will be a process server.
2.) The DMCA. You could fairly easily argue that the protocols are intended as an access control mechanism, but it would be very difficult to argue this point because anybody, anywhere, can use the World of Warcraft software. Blizzard offers it for download on their site. The only access that's being controlled is to the server software, which is not available to anybody for reverse-engineering. The DMCA also has an interoperability exception that can be invoked in this kind of situation. Even if you do not have a defensible position against the DMCA, unless the violation of the DMCA is done for commercial gain it is not criminal and can only be settled with a civil suit.
3.) Copyright violation, intellectual property theft or patent violation. This is trickier. If the server or server project distributes any files to which they do not own the copyright, they're in violation. If the server provides accurate or semi-accurate reproductions of original server-side rules and content, it can be considered a derivative work. Copyright violation is not criminal.
4.) Trademark violation. Does the emulator use any marks? Does it use anything similar to a mark? Does it distribute data files that use any original characters or settings? Can it be confused with the original product? Trademark violation is not criminal.
Bnetd was shut down thanks to a creative combination of vectors 1, 2, 3, and 4, and a very gullible judge. Still, though, the developers didn't go to jail. Actually I don't think the developers suffered any penalties other than losing their trademark-violating domain name. They were even represented by the EFF.