It seems like a small batch of LilyPad with corrupted bootloaders was sent out. This happened to some LilyPads that were sent out in the last month or so (2-3/2008). We have restructured our testing process to make sure this does not happen again! If you think you have one of these bad LilyPads, get in touch with sparkfun about a replacement.
My sincerest apologies for this.
Leah