I figured out rotary encoders by experimenting with code on this page:
http://www.arduino.cc/playground/Main/RotaryEncoders
I tried several before I got it to work to my satisfaction. I think the one that worked best for me is under "Another Interrupt Library THAT REALLY WORKS (the Encoder interrupts the processor and debounces like there is no tomorrow)."
I will say, you never do a PinMode(0, INPUT) and PinMode(1, INPUT) which may be necessary.