Ive been reading the datasheet for this PIC again. Ive found the bits that talk about the timer and interrupts etc. It says "Timer0 module will increment every instruction cycle (without prescaler)." and "8-bit timer/counter". So it appears that it will count up by 1 on each instruction cycle and keep counting until it reaches 255. The next increment will cause an overflow (resetting it to 0). If INTCON.5 is enabled then this overflow causes an interrupt.

Now if i look at the OPTION_REG Register i see some stuff about this "prescaler". If i set that to 2:1 does that mean the timer increments once every 2 instruction cycles?