Can anyone please help me.

IE |= 0x82; //enable timer 0
Enabling the interrupt does nothing, there is no code to start the timer
AND
if (!SWITCH){ //Switch pressed
SWITCH = 1; //Switch goes high (1)
Show that you need to read "the bible" chapters 1, 2 and 3(addresses in links <---)

if (!FLAG){ //If FLAG low
LED = 0 ; //Turn off LED
BUZZER = 1; //Turn off BUZZER
is never executed, mistake or are you fuzzy in your understanding of C as well?

Erik