Now I'm at a computer, I'll give a bit more detail.
When using Mach 3, the parallel port and most external motion controllers aimed at the hobby end of the market, will only thread using a single pulse. Various people will argue that a single pulse is useless, but for the majority of people it produces perfectly adequate results. I used a single slot on my last lathe, and it cut threads perfectly fine.
When you get in to the higher end motion controllers (i.e. KFlop), they normally require an encoder input, or give the option for a multislot input.
If you search ebay for 'incremental rotary encoder', basic ones of Chinese origin can be had for not much money. If you want something more specific (I.e. differential outputs) then in the US you have US Digital (
www.usdigital.com), or in the UK there's British Encoder (
www.encoder.co.uk).
The main thing is you want an encoder that produces an incremental quadrature output. For a KFlop you'll want a basic A&B TTL level output, for a Kanalog you ideally want a differential/line driven output (A, _A, B, _B) but you could get the differential output by installing a suitable line driver chip.
Easiest way to drive them, is make a bracket so you can attach it next to the spindle, and drive it using a small toothed belt and a couple suitable pulleys.
Moray