There are plenty of people around here who really want an arcade quality analog joystick, but can afford to buy one from Happ.
Why not take a lesson from a classic console, and use hall effect sensors?
I am, of course, referring to the Dreamcast.
The analog stick from the sega brand controller uses four hall effect sensors and a magnet to read analog data.
The idea would be to simply place these four sensors underneath a regular digital joystick, and glue a small magnet to the end of the joystick shaft. The interface could either use a DC->PC adapter, or you could directly wire the sensors to the game/midi port. Windows should map it to a regular joystick device.
To use it, configure MAME to use the analog joystick device, and tell it not to use the digital switches. The analog part of the stick is all solid-state, so it wouldn't affect the digital movement at all.
I would try this except for one problem...I'm using all of my Dreamcast controllers. If you have a sega brand controller you would like to (cough) send me for the sake of this project, go right ahead. Or else someone out there with a spare controller might try this themselves.
Let me know what you think.