I am using 2 XBee series 1 1mW chip antena modules, one connected to my PC with XBee explorer from sparkfun and other on my arduino UNO with XBee shield.
I have simple Processing program sending message to arduino to turn LED on and off.
And here is the problem - they work only if the range is not bigger than 50cm between them (!!!!). It supposed to be 100m visibility range. Since they are actually sending the info i assume that the problem is not with them being on wrong channels etc. And my baud rate is set to default 9600.
You left out a lot of details from your post. The distances you are getting are no where near reasonable, unless the XBees are in a very noisy environment.
How are the XBees configured? What Modem type? What Function Set? What version? What did you change?
In case anyone else finds this and has this problem:
In my case the coordinator was on channel 23 and the router was using the first channel it detected the coordinator, channel 11. Setting the channel manually using SC=1000 fixed the range problem.