OK, first make sure you understand that in your circuit now, the state of input1 (HIGH or LOW) is entirely dependent on output0. When output0 is HIGH, input1 is LOW and vice-versa. So, each time you have
<code><pre><font size=2 face='Courier'>
if pin1 = 1
</font></pre></code>
It's exactly the same as saying
<code><pre><font size=2 face='Courier'>
if output0 = 0
</font></pre></code>
But you are in control of output0 through your code. At the moment, output0 in your circuit is being used <i>just like a variable </i> , like b0 or b1 or b2. So there's <i>no need to use the outputs and inputs at all </i> for this part of your alarm.
Let's take the first bit of your code, which I've modified:
<code><pre><font size=2 face='Courier'>
'b1 is a variable (either 1 or 0) that tells the PICAXE whether the alarm is ON or OFF, just as pin1 used to do
if b1=1 and pin0=1 and pin7=1 and pin2=1 and pin6=1 then start
if b1=1 and pin0=1 and pin7=0 and pin2=1 and pin6=1 then alarmon
if b1=1 and pin0=0 and pin7=1 and pin2=1 and pin6=1 then alarmoff
if b1=1 and pin0=1 and pin7=1 and pin2=1 and pin6=0 then prechirp
if b1=1 and pin0=1 and pin7=1 and pin2=0 and pin6=1 then fulltrigger
alarmon: 'Turn Alarm System On
low 2 'Turn OFF Immobiliser
pause 200 'Wait 200 milli seconds
high 4 'Turn On External Siren
high 3 'Turn On Parklights
pause 100 'Wait 100 Milli Seconds
low 4 'Turn Off External Siren
low 3 'Turn Off Parklights
pause 500 'Wait 500 Milli Seconds
high 5 'Pull Central Lock Motor
pause 500 'Wait 500 Milli Seconds
low 5 'Release Pulse To Central Lock Motor
pause 2000 'Wait 2 Seconds
high 1 'Turn On (-) When Armed Wire
high 7 'Turn On Status Led
b1 = 0 '<----- make b1 the same as what input1 would have been
goto start
alarmoff: 'Turn Alarm System Off
low 1 'Turn Off (-) When Armed Wire
pause 200 'Wait 200 milli seconds
for b0=1 to 2 'Flash / Chirp 2 Times
high 4 'Turn On External Siren
high 3 'Turn On Parklights
pause 100 'Wait 100 Milli Second
low 4 'Turn Off External Siren
low 3 'Turn Off Parklights
pause 100 'Wait 100 Milli Seconds
next b0 'Ending To 2 Times Flash / Chirp
pause 500 'Wait 500 milli Second
high 6 'Pull Central UNLock Motor
pause 500 'Wait 500 milli Seconds
low 6 'Release Pulse To Central UNLock Motor
pause 1000 'Wait 1 Second
low 7 'Turn Off Status Led
pause 500 'Wait 500 milli Seconds
high 2 'Turn On Immobiliser
pause 200 'Wait 200 milli Seconds
for b1=1 to 3 'Flash / Chirp 3 Times for Immobiliser
high 3 'Turn On Parklights
high 4 'Turn On External Siren
pause 100 'Wait 100 milli seconds
low 3 'Turn Off Parklights
low 4 'Turn Off External Siren
pause 100 'Wait 100 Milli Seconds
next b1 'Ending To 3 Times Flash / Chirp
high 2 'Turn On Immobiliser
b1 = 1 '<----- make b1 the same as what input1 would have been
goto start
</font></pre></code>
This is entirely software based - no inputs, no outputs, no transistor. The solution you had, feeding an output to an input was actually quite ingenious, but unnecessary.
Hope you understand this now. Run through the code and see how it works. If you don't (or it doesn't work!), we'll try again.