Thanks for your replys reloadron and OlPhart,
Got it now, I had expected to have four dc states 00, 01, 11, 10 which is not really the case. The phase difference between A & B is very small though, about 18 degrees..
Another thing, is there really a need for the 4 resistors as shown in the datasheet diagram?
most other encoders just seem to require a pull-up on each signal pin, I was hoping to be able to use the the weak internal pull-ups on the PIC im using