Am I right in thinking that this, currently standalone, code will eventually find it's way into the rest of your alarm system??
If not, and this is just a bit of diversionary fun, then disregard the rest of this....
But I think you need to realise what you are doing here...
...although your code is sort of working and your are 'getting the bugs out' what is the code doing most of the time? The answer is that it is (still) sitting inside PAUSE statements most of the time - instead of one big PAUSE, you've lots of tiny ones with a gap between them that you are using to detect switches and flash the LED. But percentage wise, you are forcing the PICAXE into doing nothing for maybe 99% of the time.
So...how is this all going to work when you have to put this in the rest of the code, which is a lot more complex? When are you going to detect all the other buttons and do the processing that they demand, when most of the time you have stopped the PICAXE working by having it sit in PAUSE statements just so you can get one LED to flash?
Requirements like the one you have ('do your normal stuff, but when something specific happens do something else for the next 5 seconds, but at the same time still do all the normal stuff) are actually extremely hard to do in software with a PICAXE, if not impossible.
You could use a 'flashing LED' - with these, you just turn them on (HIGH 2, or whatever) and they flash themselves until you turn them off (LOW 2, or whatever) removing the need to flash it in software...
...but how to code it so that it it is only on for 5 seconds whilst monitoring all the other switches is very very hard.
My $0.02 etc...Martin