Yes these are steps you feel when turning the knobs and are in fact rotary encoders. For me what I'm looking to do is what you've described in your second option.
I understand creating a multiplexed interface. I happen to work as an automotive tech and see this kind of circuitry in speed control, steering control, and ignition switches often. I really want to learn and understand the operation of the FB and your add-on module. I guess I thought a DAC existed that would output variable voltages (within 0-5V), which would really simplify this task. Maybe it does exist.
Now that I understand how the rotary part can be accomplished, there are a couple momentary on/off switches that would need to be taken care of and also monitoring the status of them. I imagine for monitoring LED status of these switches, a digital input on the FB could be used to sense voltage present. Would it work to tap into the feed of the LED (anode side)?
Also, I had never heard of the I2C Bus, very impressive. The ability to run a BUS network hugely increases simplicity and physical circuits when adding devices (nodes). I guess in this application the limiting factor would be the main processor? Creating input sensors based on 5V and having the ability to BUS the information, well, that's exciting.
For myself, I'd like to take PC control of the HVAC further and possibly using the BUS system create and AUTO HVAC system with infrared temperature, humidity, and sun load load sensors.
I have only one criticism, and that's the on-board connectors. I would like to have seen something like this..HERE Wouldn't this allow connector/harnesses to be fabricated much more easily? I think the FB and your add-on eyeR interceptor are great products with huge almost endless application.
Thanks for you help. I look forward to learning more. :)