> To my knowledge reverse engineering is legal.

This is not correct. Some types of reverse engineering are legal.

> As is emulation. Which means there should be no legal issues with getting the source code of a binary executable, and then modifying it to work on another system.

These are actually two of the exceptions. You CAN reverse engineer it to make it operative but that doesn't mean you can distribute the re-engineered binary.

They could have released a patching mechanism that used the original binary, but just releasing the re-engineered binary is illegal.