I realize that the ps2 emu is not a full one in the firmware but in theory aside from any legal problems what would stop someone from extracting the current partial emu and adding on to it what it is missing? I am only talking about getting the ps2 emu running on a ps3 not on a pc.

Well, if you extract it yourself and don't distribute it in any way, shape or form, then yeah, its perfectly legal. You can distribute tools to modify it. As for adding on to it, that would be tricky. You don't have the source to modify, so any sort of modification would be extremely tricky. Also possibly risky, as its located on the ps3 flash. I know that messing with nearly anything on the PSP's flash can brick it unless you do everything exactly right. That isn't a huge problem for PSPs, as they can be recovered from a brick, but as far as I know, you can't do that for ps3.

TL; DR: Yes, its possible, but impractical.

I was not considering keeping it in the flash. I was thinking along the lines of extract, modify, eventually turn it into a pkg file. It is way over my head anyways.

Plan on porting ZeroOGL to Sony's emu?