You know those "measuring wheels" that the police use to determine the length of skid marks and such things at accidents? I built a digital one of those, accurate to 1/4 inch. It uses a 10" scooter wheel onto which a circular disk is mounted that works between a custom dual optical interrupter to create a quadrature signal. As the wheel rotates, a counter accumulates counts, each count equaling 1/4 inch. The wheel is in quadrature because my counter can recognize forward or backward movement and "back up" the count if necessary. In addition, the measuring wheel has a flip-over lever/pad that rides horizontally at the axle to create a starting point. The lever is exactly a foot long so that you can have it on the back side of the wheel, butt it against an inside wall, zero the readout, walk the wheel across the room for a few feet and then flip the lever over to the front position -- which cause the readout to advance exactly one foot. Then continue on to the opposite wall. Flipping the lever back, by the way, will subtract exactly a foot from the readout.
Oh. Did I mention that my readout is in feet, inches and fractions of an inch to the nearest quarter inch? The fraction readout is one of those old LED calculator readouts as were used in the original TI-35 back in the late 70s, early 80s.
So, you could do the same thing, enough electronics to create the quadrature signal and use the PIC or whatever to do the rest. Mine was all TTL and creating the fraction display was interesting design work!
Dean