It looks to me like what this system is described by the following relationship:

If B0, B1, B2, and B3 are 0, Z=1, and L1/L2 don't matter. Otherwise, Z=0

If Z=0, the number L1L0 = the most significant bit that is 1

So when B3 B2 B1 B0 == 0 0 0 1, B0 is the MSB that is 1, so L1 L0 == 0 0 (0 in decimal)

when B3 B2 B1 B0 == 0 1 1 1, B2 is the MSB that is 1, so L1 L0 == 1 0 (2 in decimal)

when B3 B2 B1 B0 == 1 1 1 0, B3 is the MSB that is 1, so L1 L0 == 1 1 (3 in decimal)

when B3 B2 B1 B0 == 1 1 1 1, B3 is the MSB that is 1, so L1 L0 == 1 1 (3 in decimal)

... In theory, if B3 B2 B1 B0 == 0 0 1 0, or 0 0 1 1, B1 would be the MSB that is 1, so L1 L0 would be 0 1 (1 in decimal)

Hope this helps!