hi,

void BUSYF_CHK_WAIT(void)
 {
   //Set P1 to input
   P1 = 0xFF;
   //Set R/W = 1 (read mode)
   P3_3 = 1;	   
   //Wait for not busy
   while(P1_7)
	{
	}

Well, but where do you READ busy flag? You just wait till P1_7 comes low - that`s wrong: you have DO READ command (here: select LCD)

void BUSYF_CHK_WAIT(void)
 {
   unsigned char temp;
   //Set P1 to input
   P1 = 0xFF;
   //Set R/W = 1 (read mode)
   P3_3 = 1;	   

   //Wait for not busy
   do
   {
     P3_4 = 1;
     temp = P1;
     P3_4 = 0;
   } while(temp&0x80);

Read http://www.8052.com/forum/read.phtml?id=64753 as well.

Regards,
Oleg