Right well as its christmas,season of good will and all that.
Didnt go to Whistler by the way as one who I was going with drove his motorbike and sidecar through a gate which was wide enough for his motorbike.They have had to take a disk out of his spine,but I digress,frequently.Probably wasnt such a good idea to go skiing with him anyway.

You could write a book about optical decoders for rotating shafts as it was the first project I worked on,remote reading of utility meters.But there is no universal law which says that it cannot be done in hardware its sometimes easier sometimes harder.I don't want to lecture people about how to do stuff if they dont apreciate.I shall write a proper tutorial on the subject and stick it on a page on this site and then Rob can shout abuse at it from the comfort of his own home.
So all the points raised about the merits of software and hardware decoders are all valid and the point about pulse widths only becomes important when the shaft is going like the clappers as the pulse width is the duration of the Gray code,it cycles through all four states once for each cycle throught the Gray code sequence.
As has been pointed out in real life you will find that the signal from the shaft is very noisy at high speeds and so on and etcetera.
I also appreciate that people may not know vhdl or whatever so I will attempt to stick a schematic up,and I don't need any suggestions as to where to stick it thank you.