As follows:
1. Within my Mala folder, I have another folder called 2P. This has its own Mala installation, with a special game list for two players (though it can be any variation you desire).
2. I rename the mala.exe to 2P.exe (it could be anything of course).
3. I create a shortcut of 2P.exe (and to clean it up, re-name it to 2 P).
4. I start the 'parent' Mala, and go into 'options'. I create a new emulator, call it 2 P, and leave the executable blank. In the rom entry, I put the path to the shortcut/lnk file. 'Options' is %rom% (as this is an lnk/batchfile situation). When this 'emulator' is selected, "2 P" will show up as the only 'game' in the list.
4. In the 2P Mala, I set up the MAME options according to the desired configuration. In this case, the MAME exe is in a "2P" MAME directory with a two-player configuration. (However, for the rom directory, I set it to my main MAME rom directory - as well as change the rom directory in this MAME's ini - so that I don't have several sets of roms laying about. Then in the 2P Mala options>gamelist>mame I prune the list so that only the two-player games show in the list.)
Presto. Nested Malas. No overhead during running a game in the second Mala. Each MAME version (emulator) will be 'dedicated' in its place, so XML is read, and game names, vs rom names, are displayed. When you exit the embedded Mala, display will revert back to the first Mala, and you can then exit Mala, or select another emulator.
For U360 support, make sure to run the ultrastick mapper plug-in within each extra Mala directory. When the mapper then looks for mala.exe, it says 'This doesn't appear to be a valid Mala directory. Are you sure you want to use this as your Mala installation directory?' You say YES. Then you finish the installation.
Incidentally, embedded mames can be done horizontally or vertically: a slew of emulators (mames) in the parent Mala; or as a sort of tree - Mala within Mala within Mala.