Read the rest of that thread and you'll see that most posters did not have a problem with lag, when they even noticed it.
I also noticed that he mentioned using DK as the test game -- a game which has known issues when you hit diagonals -- so there may be something other than just the encoder causing problems. 
I agree that there could be other things going on with DK, but if multiple people noticed some kind of lag then it likely has some. That is enough to say that it should be avoided.
As for people saying "they don't have a problem with it," that's a complete failure of logic IMO. The most important thing about an arcade cabinet should be
how well it can be played. Lag puts a direct cap on how well a game can be played. Whatever you natural response time is, the lag adds to it to for a longer delay.
The two (human response time and hardware lag) are additive. They don't "cancel out;" that seems to be a common notion and it's nonsense. Sorry, that part's not an opinion, it's scientific fact.
For proper gaming, input lag should be eliminated wherever possible. Sometimes we have to compromise by accepting some lag from our display if we can't use a proper CRT, but it should still a point to find the quickest flat screen available. As for a controller encoder, any lag at all should be unacceptable, given there are several others choices without lag.
1. OP mentioned that cost was a concern. See post #2 in this thread for a link to Vigo's ZD Encoder for about half the price of the MC Cthulhu and no lag issues that I've heard of.
One MC Cthulhu is $35, a PS3/PC Cthulhu is $30. If that is too much and he doesn't care about consoles then maybe he should use that instead, but I maintain that the Xin Mo should be avoided.
2. OP is building a bartop instead of a fightstick, so the multi-console feature is wasted.
Not at all. It would be easy to include a video and controller port on the back of the cabinet. You could plug a console in and flip a switch on the cabinet to work off of those ports instead of the internal PC. The console could sit next to the cab or hidden under the table.
3. OP is using one joystick and 6 buttons, so not sure where the "for each player" part comes in. The P2 Coin/Start buttons allow for alternating 2 player games.
You're right, brain fart on my part there. Wait no, now he wants to make it 2 player, lol.
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I was thinking of mentioning Logitech speakers too. Some are fairly decent quality for their size.
I would say to use the largest cones you can fit in your limited space, as there's no substitute for cone size when it comes to creating full sound. If you mount a cone directly to a circular hole in the cabinet you may get a better sound by using the whole cabinet as a speaker box rather than using the small speaker boxes they come in.
Whatever amp and speakers you use, you can run the speaker wires through a two channel volume pot to create a nice panel mounted volume knob. If the system came with it's own knob, you can have that hidden somewhere and use it to control the max volume available from the panel knob. That'll keep guests from turning it up too high and blowing a speaker or something.
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One final question -- What types of games do you plan on playing most? (It may influence your choice on the joystick.)
+1