AVR-Chat

Pardon me if this has been discussed before.  I searched through a few
messages and found some things which are similar, but not quite the same.

I'll be programming on a Atmega128 which will be connected over serial
to another microcontroller to do higher level processing.  The Atmega
will be connected to 2 quadrature optical encoders.  Each encoder will
be connected to a shaft which will do about 7 revolutions/sec.  The
encoders have 256 CPS (is that clocks per second or cycles per second?).  

If I understand the quadrature encoding, for maximum resolution, I can
hook up the 2 outputs of the encoder to 2 external interrupts and
trigger on any edge.  Using a state machine and lookup table, I can
determine the direction, and since I'll be triggering on every edge,
I'll know the distance (presumably, only 1).  Will this be too much
for the Atmega?   Where can I store the computed value?  I'm hoping I
can put it in one of the 16-bit counters.  That should be a fairly
small amount of work for the interrupt.  Since I have 2 encoders,
that's 4 interrupt pins and 2 16-bit counters total.

I'm hoping to send the data over the serial port when requested by the
master.  I'll reset the counters when they are read, thus, giving me
the difference since the last read every time.

Here's the quadrature encoding lookup table:
LR = Last Read
CV = Current Values
A, B are the seperate output channels of the encoder:
_LR_|_CV_|_VALUE_|
_AB_|_AB_|_______|

 00   01  +1
 00   10  -1
 01   00  -1
 01   11  +1
 10   00  +1
 10   11  -1
 11   01  -1
 11   10  +1

Assume +1 and -1 indicate direction.  Of the 16 possible combinations,
 8 aren't possible (assuming I don't miss any edges).  Right?

Any glaring mistakes in my plans/logic?

Thanks.