Hmm, I think it is very fast for the PIC to respond and also display to LCD. I guess that you might try use second PIC to display and get the data through a fast connection either parallel (PIC to PIC with 8 bit ports) or serial the fastest possible. This way the main PIC will have all the time to read the encoder and send the data to the second PIC or terminal device.
Also the first PIC should run as fast as you can, 20MHz xtal, or in assembly. I don't have the time to do the math right now to calculate how fast it has to run.
Ioannis
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