Hi Craig,
Thanks for the thorough description of what you are doing. Yes the problem is most certainly that you are only driving one side of the differential Kanalog encoder inputs. This is a common problem that Users often make and I'm always surprised it works at all. A differential input needs to see a + and - differential voltage across both inputs to work properly. If one side is floating (or ground) then this won't be the case. I don't know what the "exe box" is
you are referring to but I assume it converts the sine/cosine scale signals to digital quadrature outputs. I'm surprised it doesn't have differential outputs. If it really does not have differential outputs then there are low cost converter modules available to take a single ended signal and convert it to a differential signal. USDigital (and I think Digikey) sell such converters. See:
http://www.usdigital.com/products/interfaces/encoder/cable-drivers/EA
Another option is to bypass Kanalog's differential inputs and connect the single ended encoder signals directly to KFLOPs single ended inputs. You can do this by unplugging KFLOP JP5. This option would be more noise sensitive and you would need good shielding and some external termination resistance near KFLOP to get reliable performance.
Regarding the Kanalog opto inputs it depends on what you are interfacing to. But basically 5-24V needs to be applied across the +
and - inputs to be activated. You are basically powering an LED through an on-board resistance.
The FET outputs can sink a signal up to 24V @ 1A to ground. If they are driving a mechanical relay coil or solenoid the driven coil must have a fast reverse diode across it to avoid a large negative voltage spike (spark) when the coil turns off. A good method to get optical isolation is to have them drive solid state relays.
HTH
TK