This is a standard rotary encoder with a high resolution (1024 pulses per rotation). A lot of example code exists for such encoders, a page in the playground may help you further:
http://arduino.cc/playground/Main/RotaryEncoders
On page 5 of the datasheet you have the exact schema of the internals. For most applications wires A (black) and B (white) are enough, you don't need wire Z (orange).
Mechanical absolute encoder or incremental encoder?
Incremental encoder.
I have some problems with finding out what I actually need to get only rotation degrees from pulses.
If you only measure at the rising edge of A you get one pulse per 0.3515625° or about 3 pulses per degree.