The one thing I think you are missing is mapping whatever control that the game normally uses (adstick/positional/lightgun etc) to MOUSE. That is what the gun actually is, a mouse emulator, so that is what you need to map.
Also, are you setting your analog inputs in the "Controls-This Game" menu in Mame? You should be telling each gun which axis of which controller to use. So you select for instance "ADStick 1 X" for Terminator 2 and then move your gun across the screen horizontally. Do the same for Y, moving vertically. Repeat for the second gun. Finally, you will need to go into the config menu in the game (usually F2) and find the option to calibrate each gun.
And yes, if you have 2 guns, you will need to set one to a different Device ID.
We really do need an all-in-one guide for dummies on this subject. Most posts only give part of the info. I've gotten the rest by lots of trial and error. I can probably write one up once I get my guns 100% finished. Right now I'm on the last step--full auto recoil! Hope to have that working this weekend, it's already very close.

Hope this helps, these are the same steps I was missing before.