It does not comply with the App Store agreement in several ways.

1. It uses private/undocumented frameworks (for drawing video, it's the only way to get decent speed)
   
2. It reads/writes out of the application sandbox (this could be changed by implementing a way to send/receive files within the app)
   
3. The icon isn't square (easily changeable)
   
4. It runs interpreted code (that's the purpose of an emulator)

And about installing unofficial apps without jailbreaking:

I don't think it can be done, since the iPhone only runs code signed with Apple's keys, and that is one of the things that jailbreaking patches.