Well amazingly I think I have fixed it!! As with any good evening hacking I'm not 100% sure what I did - I will rebuild a new one just to check (the good thing about using VM's!!). Anyway - I think there were a number of problems
1) DRM - this seemed to go away after I followed a link to removing/replying the DRM keys to windows 7 - I basically deleted the DRM folder in Windows 7 and went to a MS website where it recreated them (see how do you manually reset the drm media rights? - Microsoft Answers
2) Network performance - the NIC on my dell server (Dell R210 ii) couldn't keep up. Basically it is poorly designed and shares the same IRQ as a couple of other devices - so the performance is very poor. I fixed this by switching to the second on board NIC.
3) I had to untick all the service options for the ethernet card on windows 7 (link layer/IPv6 etc) just left IPv4 and QOS working.
4) Applied a new Client VM tools patch and updated the tools into the Media Center VM - not sure if it helped but I did it anyway
I did do a bunch of other things so its difficult to be sure - but what I would say is that its now working both with my Linksys 2100 and Xbox 360. I will spend a few more days testing it before building a new VM to prove it.
thanks for all your help.. I will let you know how it goes