dhenry:
the internal pullup resistor from the arduino active.
That pull-up "resistance" is too high and you may not be able to turn off the phototransistor and generate a logic 0.
Use a resistor and its value will generally be < 10k.
From the data sheet, the off-state collector current of the 4N35 is 50nA max at 25C. So the internal pullup resistor will be fine unless the OP puts the opto isolator somewhere very hot, or he needs a faster turn-off time (but we're only talking about a few hundreds of microseconds at most).