Mike - what is the issue with the pin configuration? Remember, the OP is using an atmel 89c2051 cpu, not the garden variety 8051.

But, I am confused - on a '2051 you don't have P3.6 - so how can P3 be the d0-7 for the lcd?

The other gotcha is that there are not pullups on the P1.0,1 pins as these are used for the analog comparator. This is stated clearly in the datasheet. If using these pins you will need to add pullup resistors (say about 1k -10k) to these two pins. This may have been the cause of the original problem.

Its probably best to use 4 bit mode on a '2051 since you don't have many port pins. I did post some 4 bit code recently - it will need a little mod to use the required port pins. It uses only 6 port pins.