Quote Originally Posted by CuriousOne View Post
This is simple 3 pin incremental encoder, middle pin is tied to VCC, A and B are tied to PORTB.3 PORTB.4, which are also pull down with 10K resistors. If I rotate shaft slowly, then no false readings. What can be reason, some wiring issue or code inefficiency?
Well, your LCD may be slowing down the response. And since you use PAUSE and LCDOUT it is expected that program is not the most efficient. The encoder is best done in ISR and even better using hardware module when available.

Ioannis