The only way I know of mach being able to use more than just an index pulse is to use one of the external motion cards.. (and you would have to do your research) Dynomotion | Motion Control Boards comes to mind - but like I say - you would have to research it as I am a EMC person.
Emc would allow you to do it with just printer port hardware. (to a point - you are limited to the speed that the printer port can count - probably maxes out around 40khz or more depending on the computer). Emc has pretty interface hardware also that moves the encoder counting external fromt the computer. mesa makes a 48i/o board for around $90. (would also do closed loop servo with an analog daughter board)
You can do stuff like this also...
http://www.youtube.com/watch?v=ZhICrb0Tbn4]Hobbing (Gear cutting) on a Mini-Mill with EMC2 - YouTube