MAME's purpose is to preserve gaming history, and to stop vintage games being forgotten. As of 2003, MAME now supports 2197 original games, and is growing all the time.
MAME is useless by itself. You need the image of the ROMs from the arcade game to be able to play it. There are download sites where you can get ROM images. There are also people who will burn and mail you CD-ROMs with the ROM images, in exchange for material and shipping costs. Since all the ROMs would fill 15 or more CDs, downloading isn't really an option for someone who wants a complete collection.
If you own the actual arcade game, making a backup copy of your ROMs for your PC is perfectly legal. Some ROM images, such as Atari's, are available for purchase. However, it is not clear if it is legal for an individual to have ROM images for a game they don't own.
Many copyright holders are currently ignoring the MAME ROM distribution activity. This may change in the future. Some people argue that, as long as it's for personal use and you aren't selling the ROMS, it's perfectly legal. Some people argue that the copyright holders have abandoned their copyright by not enforcing it for many years; most of the games are no longer being manufactured. The actual legality depends on what country you are in, and the US seems to have the most restrictive laws.
MAME itself is perfectly legal, as it is merely an emulator. The MAME license explicitly forbids people from distributing it along with rom images.
Most people believe that you'll probably never get into legal trouble by using MAME. For the "classic", pre-1990 games, this is almost certainly true, as the market value of the rom images is negligible. Some current, post-2000 games, have been added to MAME. Some people think these games should not be included, because they risk unwelcome attention from the copyright holders. Some people quote a "5-year rule", saying that's how old a game should be before being emulated in MAME. However, there is no legal basis for a "5-year rule". The website MAME.DK was shut down due to a dispute with a copyright holder.
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