Hi thanks for the reply - I should have said that regardless of the code on the arduino the same thing happens.
If I get a new Arduino and Xbee out of the box, configure the XBee to End Device AT and plug it into the Ardunio via shield with external power, the D13 light does the flashing and the sketch won't run. (Would be the 1 second D13 on/off sketch by default)
So I think it's independent of code and I am using the standard sparkfun XBee shield.
I have seen one other post with the same issue but no solution was given here:http://www.arduino.cc/cgi-bin/yabb2/YaBB.pl?num=1288221937