It's an encoder like a POT but it clicks at each turn. There are three pins, of which the center is connected to a +5 V source and the others are connected to the 8051.
At each turn of the encoder only one of the pins changes from a 0-1, alternating pins at at each click.
For example:
if the decoder starts out while PinA and PinB are low, the first forward click will bring PinB high. The next forward click will bring PinA high.
The sequence goes something like this:

PinA PinB
0 0
0 1
1 1
1 0
0 0 <-- sequence starts over

The purpose of the program is to read the beginning position of the encoder, and then anytime it is turned clockwise, increment a value. When it is turned counterclockwise, decrememnt the value. The value begins initally at 0 and can't be decremented beyond 0.
The max value is 127.