The DRO's on Mach3 do not normally take information from your lathe/mill. The DRO's are run by the computer, according to the number of pulses it puts out to the stepper motors. In other words the DRO's show where Mach3 THINKS the machine is.
It is normally very accurate (at least it is on my machine), unless there is some problem and the motors start missing steps.
I do not use any digital scales or encoders on my machine and rely on Mach3 DRO's to be accurate.
I would have thought that the first thing to do is get your machine to respond to Mach 3 - i.e. get some stepper motors on the axis. I cannot see that this would cost much more than a digital scale or readout (unless you already have them).
Once you have your machine controlled by Mach3, you can still use it "manually" by using the "jog" facility or programming each line seperately.