Ben,
I am a longtime fan since the beginning, back when you made your first VCS portable. Thank you for the enjoyment and inspiration that you have brought all these years!
Okay on to the good stuff. I designed and built a custom Tempest X3 spinner controller, but I did not hack up a PS mouse. Instead I opted to hack up an original ps1 digital controller, because that way I could have easy access to all three weapons and not have to concatenate left and right mouse button clicks to do so. I did build a circuit to do that concatenation but it took up too much room. So anyway I used a twelve step rotary encoder sent through dual flip flops to determine direction, and then sent the logic high pulses from each of the output lines of the dual flip flops through schmitt tirggered RC tuned timers and then an inverter to send logic low pulses on either the left or right button of a "certain duration". That duration was determined by experiment to be basically just long enough to have to PSX recognize that a button was pressed. I put a trim pot on the timer tuning to fine tune the overall response. It ends up effecting a trade off for that sweet spot between accuracy and speed.
I used a radioshack project box to house it, and made a plexi-glass top for it. The workmanship on that leaves a lot to be desired. I couldn't get the plexiglass to cut instead of melt on my scroll saw. But hey, it works. And I plan to try to cover it all up with some fancy stick-on artwork......someday.
Not much in the way of real-world application, but I figured I would give it a try. I will post pictures if you are interested.