Ok, so i've managed to have a bit of a play with my encoders - hardware and software and managed to get it 'smooth'.

I changed from disks with 6deg clear and 6deg black to 2 and 10deg. This made a big difference but did not resolve the problem.

I also printed these disks in colour but they are still black. The PS file i have for making the disks orgininally printed black. I changed it to print colour but all levels are 0 so it prints black but with the CMY colours. This makes for a much denser print.

On top of that, a simple 2ms pause at the top of the ISR before reading the port gave it sufficient time to settle in either an on or off position.

Problem solved! Thanks to all that helped me out.

Andrew