http://www.youtube.com/watch?v=ixia7RMlKBA
These are the encoders used:
dentless - http://uk.farnell.com/9354042/passives/ ... 5-001-016l
with dents - http://uk.farnell.com/jsp/search/produc ... KU=1520815
To my taste encoders with dents are better since you get tactile feedback.
I will post updated schematics and firmware later.
Just as LCD and and keys (buttons), rotary encoders are absolutely optional. Some might just like them more than buttons.