magic mouse not scrolling/tracking, only clicking

I'm on an iMac running 10.7.4, and only have a wireless keyboard and mouse to use with it. Somehow the mouse isn't scrolling or tracking. I used the keyboard and various key commands to pull up System Preferences and saw that bluetooth is turned on & both keyboard & mouse says it's connected. However, the Bluetooth icon up in the top right corner of the screen, is grayed out and has 3 little dots going across it. Does anyone know what that means?

The mouse battery level is 100% as I've just replaced the batteries (thinking that was the problem).

Even going into Universal Access as the Mouse tab is selected, I'm not able to select Mouse Options using the keyboard. I'm not even sure that's where I need to go to make this mouse work properly.

Any ideas?

Thanks.