mov T2CON,#01000100 ;start timer 2 producing 1kHz signal

VALUE HAS BEEN TRUNCATED TO 8 BITS !!!! so what does this means???

Michael has answered your worry about this warning. You should use notations as expected by the assembler. For this purpose you should read the assembler manual.

As far as signature bytes are concerned, I can't really comment if you should reserve them or not. But you should use the same conventions also.

DB A5,E5,E0,A5 ;signature bytes

should look like

DB 0A5H,0E5H,0E0H,0A5H

I hope this will solve your errors, but I strongly recommend that you should read a good text book on 8051 assembly and your assembler manual. This willl save you a lot of time and future worries.