If your looking to determine absolute position for an arm or something, you might want to look at one of these neat devices.
http://www.gmw.com/magnetic_sensors/ametes/360ASMC.html
They could also be used instead of an encoder. A simple A to D instead of dealing with interrupts. There is a white paper that discuses the use of pots as encoders. This device would be applicable. This company also sells several development boards that include a magnet and holder. They would be idea for testing.