Finally able to get back to this, and thought I'd let you all know what was going on. Basically I was chasing problems that didn't exist. Beware of using tools that don't work like you think they work. In this case, my understanding of how the emulator handled things was wrong. According to the emulator tech support people at Signum:

"Timer count down, overflow and interrupt activity related to that are all deep real time actions and any stop, break, single step are disturbing the process. To add some extra confusion we try to correct timers value after stop."

"... most probably that is why you see that suddenly TF0 is cleared when stepping through interrupt service routine. You issue a step action and the TF0 interrupt service routine is executed in the "background" of the step. I do not recommend stepping through interrupt service routines, this simply disturbs real time."

So once I stopped chasing my tail, I wrote a different test program to check out and verify the suspected timer problem. (No timer problem after all, as it turned out!)

Thanks for all the suggestions while I was working on this "problem."

Dennis