The Model 2 used a pair of opto-switches that sends pulses to the encoder (Opti-PAC or otherwise) so if you are getting any movement from the spinner, the optics are okay.
Since you swapped out encoder wheel, the first thing I would suggest is to try tweaking the optic bracket slightly to see if you need to get a better "read" from the encoder wheel. If you aren't getting a good read, the encoder may be having trouble interpreting the signals.
If that doesn't help and you are using an Opti-PAC, move the spinner connection wires from the Rotary header to the Player 1 Trackball header, and connect your trackball (if you have one) to the P1 Rotary header. This has helped a few people that have reported hesitation with devices connected to an Opti-PAC.
If neither of those fixes seem to help, then I think you have some software issue or perhaps even a virus like Randy suggested. If you have any trouble getting things to work after all that, email me and we will investigate it further.