like this? (he started out with the same problem you did )
I have a scale (encoder) with 1 micron resolution. Too fast for the
parallel port dro I like. Lindsay? engraving free . I thought quadrature
division would be simple but not so.I can divide by 4 or 8 but direction
info is lost using simple D type flip flops. Any help??
Although I'm not very fond of USDigital they sell their EDIVIDE which does what you want. If it's a rotatry encoder you have it's probably better to buy a new encoder (stay away from USDigital though) but if it is a linear scale then $50 might not be so bad.