Problem with encoder - try to check voltage at pin AVCC of ATmega. It should be close to 5V.
After "Unreliable microcontroller start-up" modification, I had only 4,6V on AVCC that caused bad decoding of buttons inputs (3 buttons + resistors make a different voltages on A/D input, software compares it to reference AVCC).
Inductors 100uH has quite high resistance of 7 ohm that means voltage drop on ATmega pins.
