OK, it's a framerate thing that seems to be causing the choppy/sluggishness. If you install a framerate limiter (Rivatuner being one of them) and set it to 60 FPS maximum the game smooths out and LAN play works great.
The problem with doing this is that when you remove or delete the xlive.dll then the game movement gets choppy/sluggish. Is there a way around or to fix this?