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The only way this could
happen (that I can think of) is that the grey code lines are negative
assert (i.e. '1'=0v, '0'=5v).

Isn't that the case. The encoder is an open collector. It has low impedence (i.e. it grounds)
the pin when the value is 1 and a high impedence at 0. The connected device (transponder
or gps) has to pull up the value if it wants a positive logic value (it's this pull up voltage
that requires the diodes, if it was just sinking current they'd not be necessary).