Hi pranav,
yes, the code inside the ext1 is reached, the timer initialisation also is reached.

void timer0_initilization()
{
<blockquote>
EA = 0; /* disable interrupts */
TR0 = 0; /* stop timer 0 */
TMOD &= ~0x0F; /* clear timer 0 mode bits */
TMOD |= 0x01; /* put timer 0 into 16-bit no prescale */
TL0 = 0xFC;
TH0 = 0x17;
PT0 = 0; /* set low priority for timer 0 */
ET0 = 1; /* enable timer 0 interrupt */
TR0 = 1; /* start timer 0 */
EA = 1;
printf("Started timer 0\n");
</blockquote>}

(i'm establishing a serial connection so i can see debug messages via printf, and it starts timer0), however, it doesn't seem to reach interrupt 1 (timer interrupt). I'm not sure what exactly interrupt priority means in this context though. Since I already AM in an interrupt routine ... i'm a bit confused, as you can probably tell :)