I know it's an old thread and you've probably gotten it all figured out by now, but I've just joined the forums and thought I'd share my insight on this.
I just started with the whole CNC Milling thing within the last couple of months. I'm using FreeCAD for the modeling software, BobCAD/CAM for generating the tool paths and G-code files and of course Mach 3 for the controller piece. I ran into what I believe is the same or at least similar situation when getting things set up. What I found is that the I/J mode needed to be changed to "Incremental" in the General Configuration page. Prior to this change I was getting an error message about I/J moves. Once I changed that setting, no more problems.
Hope this helps,
Stephen "Highspeed" Kruse