You are probably getting interference from another device. I've seen similar issues with Panasonic Plasma TV's. Anytime the MS IR reciever was infront of the TV, the light would remain solid. Put it behind the TV, and the reception was great.
Try moving the IR reciever around until the light stops blinking.
Marvin on Disapproving Rabbits
Let's bump this thread again :-) Same thing here. Red light flashes randomly on a Microsoft model 1040 receiver. Turning off my fluorescent spotlights make it stop! Funny thing... light.