A while back I bought a few of these 24 pulse mechanical rotary encoder ($4.50 each):
I tried several recipes on this page:
http://arduino.cc/playground/Main/RotaryEncoders
My sketch increments a 4 digit 7-segment led display, the display starts at 5000, increases with one for each clockwise state change, decreases the other way, press the built-in shaft "button" and it resets to 5000. Sometime it jumps forward one when it should have gone back, or the other way around, or skips a bit, but generally goes in the right direction 95% of the time. I was a bit disappointed.
I just received a couple of these today, 64 pulse optical:
For some reason Mouser's main site is going to the Netherlands site right now, but it was $17.18 to me for these puppies.
Dropped it in, the only difference is it has a chip on it so you have to supply +5V and ground, otherwise the quadrature codes works the same. Works perfectly with the sample code above, never misses a step, always increments in the right direction. Absolute thing of beauty. And it doesn't have detents which I love.
Just wanted you to know. If you ever want an rotary encoder, if you can afford optical, wow they are nice.