7 days in Switzerland from Austria: Intinerary Help

What is it about Zürich - the complete opposite of a small cute town - that attracts you?

Your friend is right about Alsace.

Zurich would be a home base. We could create day trips from there. We can be flexible though.

I'd go with Luzern, just as central, prettier, and OK, more touristy.
Alsace is cute, but I don't know if I'd do it as a day trip. 2 or 3 days would be a lot better, otherwise you're just breezing through to see all the window flower boxes. Your in the Alps. Take advantage of that. Spend a couple of days in Muerren.

Luzern to Colmar is about 4-hours roundtrip, so it's a feasible day trip. If the weather is poor in Switzerland but nice in the Alsace, I would consider doing it. Otherwise, as Sam said, stick with the alps. IMO, there is no place more beautiful than the alps in nice weather.

I'd rearrange the itinerary a bit, with the Alsace as a day-trip option on day 6 or 7 if you get poor weather.

Day 1: Salzburg to Zermatt (7 hours by rail)
Day 2: Zermatt
Day 3: Lauterbrunnen valley
Day 4: Lauterbrunnen valley
Day 5: Lauterbrunnen valley
Day 6: Lucerne
Day 7: Lucerne
Day 8: Lucerne to Zurich airport (2/hour, 70 minutes)

Ok, after reading everyone's posts I am thinking I should skip Zermatt altogether and maybe stay in Lauterbrunnen or Murren and going to Grindelwald.

I need to do more research on Switzerland. I just thought the Glacier Express seemed like an amazing train ride.

Any thoughts?

The BE is a great route, but I wouldn't go out of my way to take it. If you need to go west-to-east, or vice versa, then definitely look into the BE as your mode of transport. I would not sacrifice a nice day in the Lauterbrunnen valley just to go on a train ride. Since you're going to skip Zermatt, I don't see a logistical need to use the BE route.

Day 2: Alsace Region of France (Since we like small cute towns, my friend is insisting on us going to towns outside of Colmar)

I cannot help you with travelling in Alsace by train - I (almost) always travel by car. But I do agree with your friend about seeing other towns in Alsace. My favorite is Riquewihr. Touring the town will not take very long. It;s real attraction is the architecture on its main street and its main street is only about half a mile +/- long. Strasbourg and Mulhouse are other towns to consider. In addition to its town center Mulhouse has a great car museum - in case you are interested in old European cars, especially Bugattis. The towns are small enough that a half day should take care of each one. But if you want to see all three plus the car museum in could easily take a couple of days.

We spent 8 days in Lauterbrunnen valley last summer day hiking up and down the valley and all the way to Grindlewald. You can get anywhere to hike conveniently, via bus/train or Gondola. We stayed in the village of Isenfluh (62 residents) a 10 minute bus ride out of Lauterbrunnen at Ueli's (on Air B&B if you are so lucky to get it). It was the most charming village and studio apt. and Karin's restaurant next door was marvelous! A small gondola nearby takes you to where the locals hike. We supplemented with food from the Coop Market in either Lauterbrunnen or Murren. Rick's guide for getting around the valley is essential.
We ended our 3 week trip hiking part of the Haute Route and ending in Zermatt. Its lovely, but wished I'd seen it 30 years ago when it wasn't over run with tourists. Also, the Matterhorn is incredible (a primary goal for the trip) but there is a good chance you will not see it if the weather is bad. We were lucky. Really you can't go wrong anywhere in the Swiss Alps as far as I can tell!