problem interfacing LCD using I2C bus (Solved :) )

Looking more at the datasheet the address almost seems to differ when you want to read or write to the device? Damn confusing the way it's written but you get that with some datasheets.

For a write the address could actually be 0x40 and for a read it could be 0x41.

Worth trying.

Something like this should give you alternating LED's

	Wire.beginTransmission(0x40);
	Wire.write(0xAA);
	Wire.endTransmission();

Finally the arduino shouldn't need pullups. The internal ones are enabled by default and are usually sufficient.