The output is 2 bits GRAY coded. This means one output is 90° phase shifted from the other.
While this statement is theoritically true, what is commonly refrred to as a GAAY coded encoder gives an absolute position in several bits.

Forget all speculations about speed and such. At times your encoder will sit just across a boundary and you will have multimegahertz reversals. HP oops, Agilent has a chip that takes care of all this, the only other method is a (C)PLD your micro is not fast enough.

Erik

PS using the Agilent chip multiplies the PPR by 4