The theory of operation is that there will be two photo transistors that will be picking up a reflected light pattern from a rotating code wheel. I found a nice little component (GP2S60) that incorporates both the phototransistor and emitter in a tiny surface mount package. It is called a photointerrupter, made by Sharp. A pair of these will be used to generate a quadrature signal that will indicate how fast the wheel is turning and in what direction. Being optical, they won't create any drag. I'm looking for this scroll wheel to be easy to move and have no detents, like all other scroll wheels do.
Below are some pictures from my CAD system showing the assembly of the scroll wheel:
The photointerrupters are shown in red and yellow. The circuit board will fit in the recess window on the right. Those photointerrupters will be surface mounted to it:
The codewheel is highlighted below. It will be a white piece of paper with a black set of stripes printed on it. Simply, it will be glued/stuck to the side of the wheel.