I read Winbond's data sheet, and the encryption that is used on-chip is described as follows:
6.3 Encryption
This bit is used to enable/disable the encryption logic for code protection. Once encryption feature is enabled, the data presented on port 0 will be encoded via encryption logic. Only whole chip erase will reset this bit.
I haven't checked what Port 0 is connected to on the PhatBox mainboard, but if the encryption is enabled, then it would seem that any bytes written to Port 0 would be scrambled. If Port 0 is connected as general purpose I/O, scrambling the output would yield unpredictable and unwanted results.
As for the contents of the EEPROM, it cannot be encrypted. For the 8051 micro, there isn't an intermediate decryption step between reading the ROM contents and running the instructions. It would need an entire plaintext copy of the code, otherwise how would it handle the instruction pointer?