Problem with hc-05 bluettoth module
Your android app might be sending extra characters like "end of line", which will cause the return value of Serial.read() to be other than 1 or 0 after the first byte. Nevertheless, it looks like it should still turn on or off the LED as soon as it reads the first byte, and do nothing when it reads the following bytes. I have used the "hyperterminal rs232" app successfully to send single characters, maybe give that I try to see if it helps and ensure it is configured at the correct baud rate.

I would recommend to send back to the serial stream the characters read, to ensure they have been received correctly, so I would change this:

if(Serial.available() &gt;0)
{
    state = Serial.read();
    flag=0;
} 


to:

if(Serial.available() &gt;0)
{
    state = Serial.read();
    Serial.print(state);
    flag=0;
}


Edit:

Just realised this in setup():

digitalWrite(0,HIGH);


You are setting the receive pin of the UART peripheral to hight, so that is probably why you are not reading data from your phone.