LED in the diags is not turning on or off.  I am uploading a video I took showing you the ouputs and wiring.  Should be up soon.

You may want to try changing the index in Mach from active low to active high in ports and pins. It should work as you have it.

BUT.............

I have never used an LM7805 voltage regulator in the fashion you are using it. I am not sure just how well it will turn on and off
as it is meant to take  the higher voltage and limit it to constant 5v and can deliver up to 1 amp. So if you are running your spindle at 1200 rpm
that regulator will be switching on and off 20 times a second and don't think it is meant to do that. A signal going into a computer needs to have the current limited else you can do damage. Not sure what the max current for a PP and so just won't guess.

That said, I would of put the regulator upstream of the sensor ( maybe a LM7812 , puts out 12 volts ) and then use  a resitor to control current. But i am not an electronics guy by any means.

So that is why i am not gong to tell you to try a different pin on the PP.

RICH

Yeah, I see what you are saying Rich.  Switching the active low didnt work.  I could try the other regulator like you said and bring it to 12 volts.  How big of a resisitor would you think I would need to bring it down 7 volts?

I was thinking to that even if the regulator is too slow it still should be tripping the LED in Mach3 but its not.  It should be on and staying on if it was fast enough.  Hmmmmm, interesting.  Not sure who to turn to in order to fix this.

Here is the post for the video just in case you are curious:

http://www.youtube.com/watch?v=bMJUCqT974s

Good  video and confirmed all we have been saying and here is a schematic.

- Check the voltage on pin#12 of the BOB's db25 connection.
- Check the voltage on pin#12 of the cable at the other / PC end.
You should see roughly the same .5 to 5 V change and if so that would mean the index signal is good up to
pc and there is not a cable or pin problem.

RICH

I have a hobby cnc board and use a spindle sensor. Mine has an exterior power source and works fine. The 1 thing I would try, is to disconnect the fan from the board during the test. I dont trust anything in line during testing. It wont burn up anytime soon. In fact my fans are 110v and I dont use the 24v terminals at all. Worth a try, but you should see something in the diagnostics window and we know your switch is recognizing the  mark since we see the led light up. Do you have a grounding adapter for your 120v plug that removes the ground for a test? I notice you have a metal  case for your hobby cnc board. I cant tell you how many problems that caused in my case. Since Dave recommends a plastic case, he doesnt have the grounding issues we have brought upon ourselves. Do it just for a test if you dont mind. EVERY TIME I brought anything new into the system, (limit switches, probes and spindle index and speed control circuits) it always faulted and wouldnt proceed. It did not trigger a reset. Worth a try and I dont have enough electrical knowledge to explain why.

IANOBER,
After you have checked out the PP cable as recomended and it that was not the problem try a different debounce setting.

In General Config> Index Debounce - instead of 100 try 1 or 10 or 30. That setting has an affect on what Mach considers
a valid signal for the index and can affect the displayed rpm. Easy to do.....
RICH

Btw debounce will have no effect on the grounding issue if that is what it is. If the debounce interval was too long it would miss the counting.

Fastest, the case is not metal, it is the same case that is recommended in the Pro driver board installation.  It is a hard plastic case.  My 120V main power input does not have a grounding wire.  I am not sure where I would ground the 120V, perhaps to the green wire with the yellow stripe on the transformer? 

Rich, I am checking the Parallel cable as I write this so I will let you know if the cable is an issue or not.

Ianober,
If the case was metal you would usualy put a lug on the case and the bare ground wire would be attached to it.  That would protect the user should he touch a hot box ( the circuit breaker would pop if there was a short to ground ). If GFI protected then if a small current was sensed the breaker would pop. The transformer is usualy bolted to the metal case so you have a path to the earth ground. The transformer may not have a ground wire, the green with yellow strip could be a tap for a lower voltage off the secondary windings of the transformer. The primary and secondary windings of the transformer are suported by the transformer frame so attaching the ground wire to one of the mounting bolts of the transfomer would be acceptable because to you are using a plastic box. Just remember that i am not an electrician and safety is your sole responsibility!

Let me know how you make out with the cable check.

FWIW.....I have been were you are.......so smile as today is just another learning day! 
RICH

I cant thank you enough Rich for taking the time to troubleshoot with me.  I tired the Yahoo group with Dave Rigotti, the one who sells the driver board and he closed my thread for being "off topic" so your help has been invaluable!!