I wanted my robot to be able to do dead reckoning, so I needed wheel encoders. There are some encoders on the market that can work with the Dagu yellow motors, as in the Magician chassis, or with the Solarbotics gear motors. And Pololu makes an encoder for their micro metal gear motors that detects wheel motion and direction by detecting white reflective tabs built-in to the wheels.
But I had already decided to use continuous rotation servos, which don't have a second shaft on the non-drive side to mount an encoder disk. Instead, I decided to mount a paper ring of encoder stripes on the inside of a Solarbotics servo wheel. I needed some way to detect the changes between black and white as the wheel rotated.
I found a set of components from Optek on mouser.com that seemed promising. They were a combination of an LED and a phototransistor, packaged together in a trapezoidal case with a screw hole.