Hi Gfact:
I don't know anything about the EMC encoders. For the 5v supply to the encoders, you should setup a 5v supply, and not take the power from the I/O board. When I setup my machine, I kept getting errors on one axis. Upon checking the voltage at the encoder, I was reading about 3.5v and not the full 5v. I changed over to a separate 5v supply for the encoders, and input the 5v on the I/O board where the encoder wires connect. This cured the problem. It was a couple of years ago, so I can't give any details, but the low voltage was a problem as I remember.
The AMT-102 encoders with the differential line driver made a big difference in the machine. I have had zero problems in homing, and accuracy since. Also, my original machine wiring was very high quality, with shielded cable everywhere, and individual wires in the loom with foil. Also, each pair of all the signal wires, i.e. A+/A-, were twisted pairs with separate foil wrapping on all the pairs.
When connecting the RJ45 connector to the loom wires, I make sure to use the twisted pairs of the RJ45 wires match the twisted pairs for all the signal wires. You have to do a continuity check from the I/O board, all the way back to the RJ45 connector to make sure there are no mis-matched wires.
From what I have read about grounding, it is not a good idea to share power supply grounds because of ground loops. This can occur when there is a very tiny voltage difference in grounds, causing a current, which then creates a ground loop. Since the encoders are only 5v., the grounds are more vulnerable than the 24v signal wires that the dspmc uses. The dspmc uses a 24v supply, and the encoders can have a separate 5v supply. Also, make sure the AC wires are properly connected, i.e., Hot, Neutral, chassis Ground green wire.
Do not connect the DC negative to the chassis ground, as that can introduce noise into the system.
From your description of DRO's not moving, crosshairs on the run screen etc., it sounds like there is a major malfunction in the program behavoir. You might try re-loading the program, and also make sure there are not any old programs running in the background. The forum has various accounts of some programs interfering with Mach3.
I would suggest getting a new hard drive, and start a clean install from the ground up. Considering the cost of machine, tooling, and time spent overall in setting up a finished machine, the hard drive is a small expense. You can re-install XP from a disc, but Windows 7 will have to be a new program. Newegg has Win7 on sale for 85.00 this week. This way, you know exactly what the computer environment is.
That is all I can think of at this time.
John