Make sure that the spacing between the encoder and the codewheel is correct. US Digital says that an air gap of .07 inches is ideal. Be sure that the pattern-side of the codewheel is facing down towards the encoder and that the codewheel is snug on the shaft.
Here's a link to their website with more information.
http://usdigital.com/products/encode...otary/kit/e4p/
Hope this helps.