I only have income from NY, my husband only has income from NJ. We both live in NJ.

We filed MFJ on fed tax and MFJ on NJ tax since we are both residence in NJ. We itemized deduction in both Fed and NJ state tax.

While we are both non-resident in NY, and my husband has no income from NY, It seems OK to file MFS for NY and only report my NY income, I will use itemized deduction in NY state as well. Is that legal?

No - you must file your NY State non-resident tax return (Form IT-203) as MFJ. See instructions regarding filing status on page 14:
http://www.tax.ny.gov/pdf/2010/inc/it203i_2010.pdf

There's really no down-side to filing jointly - while it does require that you report your husband's income as well as yours, you actually only pay tax to NY based on your NY-source income, not his NJ-source income.