The term "fansub" is almost exclusively applied to fan-translated and -subtitled
anime, although I have seen the term used from time to time in reference to some obscure and
cult Asian live-action films, which likely have an appreciable amount of audience overlap. Before the mid-1990s or so and the entrance of anime into mainstream American popular culture, fansubs were often the only way for an English-speaking audience to watch anime, which had not been commercially translated and released in any notable volume. Most popular and some incredibly obscure anime titles were fansubbed at one point, either prior to or in the absence of their acquisition and American release by commercial distribution companies.
Implicit in the term is that the translation project is a labor of love - Hong Kong grey market translations, as commercial endeavors, do not qualify, and those that sell or charge more than a nominal fee for distribution of fansubs are often vilified among the viewing community. The legality of fansubs is vague at best and illegal but mostly overlooked at worst, and many in the fansubbing comunity adhere to a code of ethics that prohibits the translation and distribution of titles which would compete with "legitimate", commercially released versions. Of course, many others do not.
How Fansubs Are Made
Step I: Source
The first thing to do when creating a fansub, obviously, is to obtain a copy of the Japanese original. DVD, or earlier, laserdisc releases are valued for their high picture and audio quality, although working with video captured directly from the Japanese broadcast, either directly to file or onto DVHS or other high-quality media, a fansubbing group can get their translations out sooner after the original airing, possibly beating out rival groups. (The protestations of "ethical" fansubbers aside, the dynamics of fansubbing are much similar to that of the warez community, though there is nothing inherently wrong or shameful in this.)
Step II: Script
First, a record is usually made of the original, Japanese-language dialogue. As this may be spoken quickly, in accents, in slang, or by multiple characters simultaneously, this task often falls to someone with a good deal of Japanese fluency. The person responsible for making these notes, or for doing any part of work on the fansub, might not deal with the rest of the production at all - groups parcel out work according to ability and desire, and often use scripts created by others for the purpose of fansubbing. Ideally, this transcription will be chronologically annotated, which makes the timing of subtitles easier later on.
Next, the transcription is translated to English. As with all translations, quality will vary, but ideally a translator will understand Japanese at a functional level and be able to turn that into something as natural-sounding and compact in English as possible without sacrificing meaning or things like tone or individual characters' personalities. This may be a significant challenge in particularly textually dense anime, heavy in meaning and wordplay, and shows with a significant amount of subtlety and long-term plot may force translators to watch the entirety of the series and/or consult secondary materials to make sure they don't unintentionally overlook or mistranslate something that will become important later. Where the capabilities of direct translation fails, these translators might also be called on to write explications or "liner notes" for concepts or references that non-Japanese, even non-Japanese of the kind that watch relatively obscure anime, would not be expected to understand.
Step III: Subtitles
With the script made into English, the subtitles will have to be timed and arranged so that they follow the action, are visible onscreen long enough to read, do not cover up any important visual details, and are of a contrasting color to whatever they are on top of. Once fansubbers know what the subtitles will be, and have perfected the timing so they know when the subtitles will be, the subtitles are ready to be grafted onto the video. The traditional way to do this was by using a genlock, a device for mixing two video signals, usually found as peripherals to Amiga computers. The "raw", unsubtitled video would be one of these signals, the subtitles would be the other, and the resultant output would be recorded as a composite whole. Now that desktop video editing has become more feasible, the addition of subtitles can and often is performed entirely in software. Increasingly in recent years, fansubs, called "digisubs", are made that deal entirely with digital video, taking this approach but never being put to physical media, remaining as video files.
At this point, the translation group often adds some self-promotion. Appended to the beginning or end of the fansub or appearing onscreen during the opening or ending themes or eyecatch, this may range from a simple subtitled "produced by" credit to a logo or brief video, depending on the group's capability and sensibilities (cf. 64k intro).
Step IV: Distribution
Traditionally, fansub groups produce a small number of first-generation (and thus high-quality) "Master Copies", which are given to group members, close friends, benefactors who had supported the translation effort with money or assistance, and distributors. Distributors, with the capacity and willingness to copy fansubs in high volumes, are the highest node on the tree with which the average viewer will have contact. Distributors make known what fansubs they have access to, and fans send distributors a SASE, a list of their requests, and depending on the distribution model, blank tapes to copy the fansubs onto or money to cover the cost of tapes, plus perhaps a small surcharge to cover equipment wear and time (although these charges are a source of some controversy). In return, they recieve copies of the fansubs in the mail within a reasonable span of time, depending on the distributor's capabilities and backlog. These copies (second generation at the highest) are then often duplicated for friends, fellow club members, and other fans interested in trading. Audio and video quality will degrade with each generation, however, so there are practical limits to how far this can go.
Digisubs, by contrast, when finished are compressed and then uploaded to FTP and Hotline servers, given to group members and contacts with high-bandwidth connections for dissemination on IRC, and made available on file-sharing networks. From here they are downloaded, reuploaded to other locations, and transferred to friends - as video files do not (the odd case of data corruption aside) degrade with copying, it is not surprising that digisubs tend to disseminate in a far less organized and hierarchical manner.
Step V: Success
Viewers watch something that even among anime fans, many will never see, at least for the time being, enjoy themselves, and get to feel elite. And the fansubbers, spirits bolstered by the glow of knowing they made this happen, find something new and start all over again. Or, possibly, move up in the anime translation world - it's not unknown for translators who cut their teeth on fansub projects to do freelance or staff work for commercial anime distribution companies.