No, you're not installing it wrong, Dabone. I posted about this earlier somewhere. The rotary adaptor is a hack and it shows most prominently in what you describe. I've been playtesting my 49 way joysticks with rotary adaptors here for a couple of days and I haven't noticed any weird behavior from the joystick hitting the screw, which could easily be taken out of context. Floyd mentioned that he's open to suggestions, if you might have a better idea of how to mount the thing. My biggest gripe so far with this great little device is that Ikari Warriors is still imperfect in Mame. I mean--can't they just have one button press equal to one turn of the guy. I really can't get the analog settings to be perfect. I tried Analog Mame for a little bit, but it didn't really seem better in my limited testing. I will test a little more when I'm a less busy and report the functionality to Tiger-Heli, who requested that I (or anyone) do some tests with and without Druin's board.
Another thing you'll notice about the rotary adaptors is that they are stiffer to turn as you push the joystick further away from center. I just played through Midnight Resistance and I did notice a couple of spots in the game, like where you get lifted through the trees on several platforms, where the action gets pretty frantic and harder to rotate and move. Maybe when the grommet gets broken in on these joys it will get more smooth even during these times. I used 100% sensitivity on Midnight Resistance, BTW. Hope that helps. Have fun spinning your rotaries.
Cheers,
KenToad