I'm very fond of the way scrolling with a touchpad works in Mac OS X Lion: Scrolling is able to track movement very precisely which leads to a more intuitive experience for the user.
On my PC I own both the Logitech G700 mouse and the Razer Mamba mouse, both of which use the traditional mouse scroll wheel.
Now rotary encoder technology (mechanical or optical) has been around for a while but it seems that nobody in the computer hardware industry has considered enhancing the functionality of the mouse wheel past the basic incremental scroll tracking with about 20-30 positions (which works out to somewhat under 10 degrees per notch). Technically they do use an optical encoder to accomplish this, but it is a very basic system.
I am aware of recent mice from both Microsoft and Apple which feature nice capacitive touch-control interfaces for scrolling, which I'm sure can offer the same level of performance for scrolling as the Macbook touchpad. But this question is specifically about the traditional mouse form factor with a physically rotating mechanical wheel, which in my opinion is a superior method of interface. One reason is that the wheel acts as a physical object which we manipulate directly for the motion to be interpreted. Another reason is the friction between the finger and the touch surface depends on a number of factors, whereas with a mouse wheel this behavior can be made consistent as kinetic friction is only intended to affect the motion of the wheel at its axis.
The G700 mouse for example has a really neat feature which allows the user to switch between two mouse wheel friction settings at will using a mechanical toggle switch. This is fantastic but it leaves me wanting more because I want better than ~7 degree precision.
Does there exist rotary encoder hardware in a form factor that could be suitable for placing within a computer mouse?
What I want is a mouse wheel without "notches", which can track to a precision of 1 degree. I'm still undecided on what kind of rotational friction/damping I'd want on the wheel since there are pros/cons either way.
As a gamer, though, I'd also want the notches sometimes. I'd probably swap back to the G700 when I fire up a game.