"what happen during an interrupt?"

Many BAD things if you dont take care of the timing isues - when one interrupt is being serviced and before it had a chance to finish, if another interrupt from the SAME source comes along - man your code needs a look into. You also only talk about not stopping the timer but atleast I do hope you are reloading it.

Any way you seem to have suddenly jumped over to PIP with 8051 from interrupts. We used to have this kind of approach with a particular member who also had a problem with interrupts.

Raghu