The zigbee modules(XBEE) work at 3.3 V and Atmega 32 works at 5V. I am using the level translators LM1117 for interfacing the levels of XBEE and ATmega.
Now, i m thinking about one more thing. Do i need this level translator at the output of Xbee which is connected to the input of atmega. This is bcos, the high level output of xbee will be recognized by atmega32 as logic 1.