Sir Poonga,
The new design would be repeated 4 times, so there would be 32 LEDS, but it still does not get around the matrix problem. If C0, C1, D0, and D1 are all on, you still get four lights.
I also am wondering which microcontroller gives you 255 output lines? As far as I know, most of the cheaper ones don't have anywhere near that number of lines.
Beley,
Here is an example, If I wanted to setup Asteroids to have an authentic feel I would want to use only buttons. On my panel I would probably use Player 1, Buttons 1 and 2 for left and right. Player 2, Buttons 1 and 2 would be thrust and fire. Player 2 Button 3 would be hyper space. As soon as I try to turn on P2B3, then P1B# would also light up.