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I contacted the Windows 7 team and they were intrigued. It turns out that it isn't actually a problem with the VHD functionality, but instead a driver hasn't been installed correctly from Windows Update. The guys were saying it looked very much like the installation had begun for this driver, then stopped and cancelled for some reason.
So they got me to check out my Device Manager and I was missing the Microsoft VHD driver under Storage Devices, but had 2 unknown devices under base devices. I was instructed to delete said unknowns and try mounting another VHD. This time a new Device appeared under Base Devices called Microsoft ISO VHD something (I forget the last bit, it was another acronym). Ok so this is an improvement but still not right, according to the Microsoft guys. So next we updated the driver for this new device manually, as Windows Update wasn't connecting for some reason. After going to Disk Drives and selecting the only compatible device, a Microsoft VHD driver, we installed it and hey presto I now have the rather sexy functionality of being able to mount VHDs :)
One point to note, is that VHDs do not stay mounted after a restart or shutdown of the system.
So thanks to the guys over on the Windows 7 team, you rock! :)