About the encoder wheels - I have them printed already. I assumed that if I create them not as fixed window-width but "rays" from the centre of the wheel, I can have the gap width adjusted by moving the encoder reader+LED part closer-further from the wheel centre. (and then just cut them smaller with scissors). I wrote those in Postscript. But I don't think more than 2048 CPR can be achieved with wheels like 12cm diameter (this is the biggest I've printed and in 600 DPI the quality sucks except really close to the edges, but 720CPR encoders look quite OK up to half their radius.
I may post the file later when I get access to it. I rather thought about getting completely "alien" encoders (i.e. bought from Agilent) and using them with the mouse chip.