if you look carefully you can see that there is a 2 pin device-the IR LED and another 3 pin component wich contains 2 photo diodes. the wheel that is between the 2 has some lines, so that when the mouse mooves in one direction then one of the photodiodes is covered(A) and then the other (B) so, for forward you might have something like AB-AB-AB.....and for back it is in reverse, BA-BA-BA.... so this is how it tells not only when you moove, but wich way you moove it. the same is for left and right....