I've been to control panel and it is working, I've tested every button on players one and two. They all highlight when pressed and show they are functioning on control panel.
That eliminates the Xin-Mo as the source of the problem.
If you have the 2-player Xin-Mo instead of two separate 1-player encoders, I'm pretty sure that rules out windows reassigning controller positions.
Can you launch a game in MAME and post a screencap of the "Input (this game)" menu like Yamatetsu suggested?
Screencaps of the "Input (general)" -- "User Interface" and "Player 1 Controls" menus could also be useful.

If you can't do that, please post a copy of your "mame.ini" file. (should be in the ..\mame\ini\ folder)
Scott