Problems reading incremental rotary encoder

It's possible your RC circuit you're using for filtering is doing more harm than good by slowing down the signal and causing "bounce". An RC filter is not a really good way to get rid of bounce unless you follow it with a Schmitt trigger squarer like a 74xx14.

So...things to try:

  1. Get rid of the RC circuit
  2. Use less filtering (smaller R and/or smaller C)
  3. Replace 74xx04 with 74xx14

And this effect could definitely be fast enough that you wouldn't see it on the oscilloscope at the time scales you are looking at. You may be able to see it occasionally at the output of the 74xx04 (if I'm correct) if you really zoom in on the timescale of the oscilloscope and look at just one edge.

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The Gadget Shield: accelerometer, RGB LED, IR transmit/receive, speaker, microphone, light sensor, potentiometer, pushbuttons