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Optical mice works as camera looking at a suface and watching any patern moving bellow. LED or laser is used to illuminate surface and specialized IC is used to both sense and process image to estimate movement of mouse. Microcontroller is used to communicate data with PC. You can look up at Avago.com various chips for both LED and laser mice. Design kits are available that can give you more info how system operates.
For starter look here:
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