Well its been an interesting discussion to say the least

I happen to have aces up my sleeve on this one: my wife's father and several friends who are lawyers. After a few long discussions, here is the condensed version of my findings which I thought all of us could benefit from. LET ME PREFACE BY SAYING THAT I AM NOT A LAWYER MYSELF AND THE SUBSEQUENT DISCUSSION SHOULD NOT BE REGARDED AS SOUND LEGAL ADVICE, IF YOU HAVE ANY QUESTIONS ABOUT YOUR LIABILITY THEN YOU NEED TO CONSULT A LAWYER YOURSELF. Anyway, with that disclaimer out of the way, back to our discussion.
BOTTOMLINE is that you are liable for whatever you build regardless of whether you sell or give it away or have others use it in your own home. This doesn't apply to say a TV set you buy from best buy and then sell on ebay, which then malfunctions and burns down their house. It only applies if you made modifications to a device which could potentially cause a malfunction in that device and injure someone else. There is however a potential way out of this. You have to sell it AS-IS. (no big surprise here). However, the AS-IS designation is actually a precise legal term (go figure), and you have to use that exact term in your contract. So if you want to sell something, you need to type out a bill of sale, stating that you are selling it AS-IS and detailing as best you know what some of the known risks associated with the device are including electrical shock, electrocution, electrical fire, etc. You need to have both the seller and the buyer sign this form, stating that the buyer is aware of these risks and that no guarantees are being made as to the safety or suitability of the device and that he accepts this risk. If you just state that you are selling the product AS-IS on your ebay ad that is NOT GOOD ENOUGH. You need to have the written signed contract. Even then you might still be sued, but you would likely prevail in court with that signed bill of sale in hand. You need to do this even if you give the device away.
Now knowing all of this I have still made the decision not to sell my arcade machine. I am just going to leave it in storage. Sure the risks are low for being sued, but the potential disaster that could ensue were anything to go wrong is just not worth the few dollars I might make off of it. Don't get me wrong, $1000 is ALOT of money to me, but it isn't worth the risk in my estimation even if it is for $1000. I'll wait until we buy a house and I have my own recroom to move two arcade machines into.
Of course, this can work to your advantage. For those of you looking to upgrade your MAME machine, I would build your second cabinet, tell your wife you are going to sell the other one and then whip out the liability issues once you finish the new one. Wallah, you now have yourself two MAME machines
