Your code works perfectly for me. Perhaps the problem lies somewhere else in your program. Or it could be your keyboard. Test how many keys it can handle by going to notepad and pressing up to 4 or 6 letter keys simultaneously. See up to which number of presses (letters) it is registred.

I added a visualisation of the keypress to test it.

1. boolean up, down, left, right;
2.  
3. void setup() {
4.   size(500, 500);
5.   smooth();
6. }
7.  
8. void draw() {
9.   background(0);
10.   if (up) ellipse(width/2, height/4, 30, 30);
11.   if (down) ellipse(width/2, 3*height/4, 30, 30);
12.   if (left) ellipse(width/4, height/2, 30, 30);
13.   if (right) ellipse(3*width/4, height/2, 30, 30);
14. }
15.  
16. void keyPressed() {
17.   if (key == CODED) {
18.     switch(keyCode) {
19.     case UP:
20.       up = true;
21.       break;
22.     case DOWN:
23.       down = true;
24.       break;
25.     case LEFT:
26.       left = true;
27.       break;
28.     case RIGHT:
29.       right = true;
30.       break;
31.     }
32.   }
33. }
34.  
35. void keyReleased() {
36.   if (key == CODED) {
37.     switch(keyCode) {
38.     case UP:
39.       up = false;
40.       break;
41.     case DOWN:
42.       down = false;
43.       break;
44.     case LEFT:
45.       left = false;
46.       break;
47.     case RIGHT:
48.       right = false;
49.       break;
50.     }
51.   }
52. }

Thanks amnon, it looks like it is in fact my keyboard.  Interestingly, when I switched UP, DOWN, LEFT, and RIGHT to 'w', 's', 'a', and 'd' (and keyCode to key, of course) I could get right, left, and down; right, left, and up; or up and down to work, but not up and down if either right or left was pressed.  With the actual arrow keys it was only any two keys regardless of combination.  Anybody else on a 2010 Macbook Pro running OSX 10.6 able to reproduce or offer any additional advice?