Just set up my first control panel and wired everything and when i goto setup emulators both player 1 and player 2 are both coming up and set to the 2 key. Im using the xarcade encoder. Each button has a different color wire going to the encoder so its not hooked up to the same button. Any thoughts or is this how it works?
I'm assuming that you have already tried using the P1/P2 Start buttons to "type" in Notepad and both are sending "2" instead of sending "1" and "2" -- if not, please check that before doing aything else.
Next check that the wires are on the NO and COM tabs, but not the NC tab.

My first thought was that the X-arcade encoder uses isolated grounds (one per connector), but the P1 Start button (J2 purple wire) and the P2 Start button (J2 green wire) both use the same ground (J2 grey wire) per the diagram
here.
With power removed, use your multimeter to check for a short between the J2 purple wire and J2 green wire.
Scott