Hi,
First of all, the original poster should do copy/paste more careful. In original source posted by me it was

	MOV	TCON,#00000000b	; stop timer 0
	MOV	TMOD,#00000001b	; timer 0 is 16-bit divider

Okay, now it is about your comment Near the end of your T0_ISR you are performing several bit manipulations, one of which, ANL A,T0_STATE, destroys the data you have developed
Have you read the comments of this line? It is exactly:

 	ANL	A,T0_STATE	; detect realised buttons

And it means that button flag will be set only when button is realised. If this line of code will be deleted then button flag will be set twice due action - one time when button is pressed and another time when button is realised.
Btw, my original code I have posted, works realy (=
Good days!