First off, yes,
fan art (includes fanfic) is still legal, reread the link. What they did say is that MS can use your fanart without paying you or giving you credit because it is their IP, but other than that, you are free to do it. Now while technically machinima is a part of fanart, MS has given specific rules governig it, so we'll have to look at it separately.
To this day, all Halo-related merchandise and products have been liscened and sanctioned by Bungie and MS. This includes RvB, the action figures, WizKids' HaloClix, the books, the soundtracks, the comics, and even GameFuel (which i think actually tates decent...). RvB stopped because they want to pursue another IP, but they are still allowed to sell their DVDs, and probably will do so for quite some time.
Yes, pepakura is illegal, by definition; we rip the ingame 3d model and transfer it into a physical model. Now, while the process of pep is illegal, then end result IS NOT, because not even the best among us (Adam and Link, namely, although Spase is pretty good) can mass produce our items, nor would we stand to make much of a profit by doing it one at a time.
Mass Production is defined by Webster's as "the production or manufacture of goods in large quantities, esp. by machinery and division of labor." What we do is commission; whether or not we do it for ourselves or another is superfluous. I highly doubt that any of us has the means to mass produce our items. I know wombat#### (I can never remember the 4 numbers he has after his screen name) has access to a CNC machine, but even he would not be able to mass produce it.
Vaccuum molded pieces are a whole other story though. You are not ripping ingame assets for use in your craft, you are hand making the original prototypes/molds. The pep argument has no place in here. Vaccuum molders are relatively safe, as long as they dont try to mass produce their pieces.
As for soundtracks and audio effects:
You can’t necessarily use the soundtracks or audio effects from the original game.
Later in that bullet you read about the agreement between MS and O’Donnell/Salvatori, Inc., composers of the music.
This allows you to use any music from the Bungie Halo games that feature music made by them, as long as the result is non-profit. Easy enough, considering the vast majority of machinima is non-profit; I think RvB being the only one that has ever really sold anything. I dont know about the music for Halo Wars, so I can't say anything there. As for the audio effects, their inclusion of this is somewhat petty; how is one supposed to make an audio/video work without the use of the ingame SFX? I highly doubt MS will prosecute machinima makers for the use of SFX.
You cannot use your item to promote a commercial venture...so your costume contests are ok, unless the costume contest itself is a promotion of a commercial venture; otherwise the holder(s) of said contest are at fault, not the maker/wearer of the armor. Anime-kon, Otakon, Comic-con, Dragon-con, whatever, is all still safe, as these events are not representative of a commercial venture. But let's say you were making a car, and promoted it by having the Master Chief drive it around...that's CR Infringement, and therefore illegal.
And as for the possible Bungie sanction of our wonderful community here...while Bungie still owns Halo, MS has the IP (Intellectual Property) rights to it. This means that if Bungie wants to make another Halo game, MS
must be the publisher/distributor. This is the same reason Halo Wars can be made completely separate from Bungie Studios; I said "can", not "is", as Bungie is offering artistic assistance to the company making Halo Wars (Ensemble Studios). MS is the producer/distributor of Halo Wars, and have the complete rights to it and all merchandising.
So, now that my fingers are cramping up, I hope I've cleared up a bit of the confusion surrounding this topic. Argue with me if you feel the need to, but please keep it sane and considerate; I'm not trying to start a flame war here, and I don't want to give the mods more work than necessary cleaning up rude and/or inconsiderate posts. From what I've seen here this doesn't seem to be a problem, but I'd rather not be the start of the fire.