Info on using the G2 controller is here:
http://www.inertiasoft.com/fsonefaq/#Q1009-FS1
In the 2-player mode, you also need to click the interface button and pick the G2 interface for the second player.

The same info is on the fsone.com site.

Make sure you have the latest patch w/ the new help manual. It's there under the section "Two Player Freestyle".

Michael