Creating Screen Shots From Youtube Videos

Josh,

Go to YT and scroll to the bottom of the page and click on the link that says "Terms".

Read their TOS, especially this part... (emphasis mine)

6. Your Content and Conduct

1. As a YouTube account holder you may submit Content to the Service, including videos and user comments. You understand that YouTube does not guarantee any confidentiality with respect to any Content you submit.
2. You shall be solely responsible for your own Content and the consequences of submitting and publishing your Content on the Service. You affirm, represent, and warrant that you own or have the necessary licenses, rights, consents, and permissions to publish Content you submit; and you license to YouTube all patent, trademark, trade secret, copyright or other proprietary rights in and to such Content for publication on the Service pursuant to these Terms of Service.
3. For clarity, you retain all of your ownership rights in your Content. However, by submitting Content to YouTube, you hereby grant YouTube a worldwide, non-exclusive, royalty-free, sublicenseable and transferable license to use, reproduce, distribute, prepare derivative works of, display, and perform the Content in connection with the Service and YouTube's (and its successors' and affiliates') business, including without limitation for promoting and redistributing part or all of the Service (and derivative works thereof) in any media formats and through any media channels. You also hereby grant each user of the Service a non-exclusive license to access your Content through the Service, and to use, reproduce, distribute, display and perform such Content as permitted through the functionality of the Service and under these Terms of Service. The above licenses granted by you in video Content you submit to the Service terminate within a commercially reasonable time after you remove or delete your videos from the Service. You understand and agree, however, that YouTube may retain, but not display, distribute, or perform, server copies of your videos that have been removed or deleted. The above licenses granted by you in user comments you submit are perpetual and irrevocable

Now, this is not legal advice, but if you read YT's TOS you can see they demand any uploader to basically surrender any rights to the works - "you license to YouTube all patent, trademark, trade secret, copyright or other proprietary rights in and to such Content for publication on the Service" - so their butt is never in a sling.

Additionally, the uploader has to grant YT's user base practically the same rights as highlighted above. (see the red text).

They grey area that laymen like myself wonder about is "can the material be used outside of the functionality of YouTube?"

Because it is laid out in specific terms that content uploaded to YT can be used, reproduced, and distributed through the functionality of the service.

So screenshots taken from YT videos are allowed to be used to create other videos for use on YT, according to the way the YT TOS spells it out, but I would do some further research if you're just ripping the screenshots for use outside the scope of YT's TOS.

~Bill