I've tried a few things over the past few days and the problem has seemed to have been reduced to exactly how zenoise describes it. Sometimes the lag is there, probably about 1 in 10 times. As long as I turn off megadrum and restart my computer the lag is not present and I can play. One time I think I left the megadrum on overnight after using it, then turned my computer on and the lag was already there. What I first did was use a shorter USB cable about 1.5m (from 3m) then updated to the latest firmware and then set it up. Now I am back to using the longer cable, its still the same. Unlike before I can now make changes to the settings and save etc without it producing the problem . It feels like its definitely something to do with the USB interface. I read up on the noteon/notoff thread about the startup timing of the PIC, could it be something to do with that? Sorry I'm not completely familiarized with the electrical detail of the Megadrum, and I'm not trying to assume anything until its comfirmed.
At this stage I wont worry about sending it back. Before I couldnt play at all but now I can at least get the drums working most of the time, now I can understand why zenoise said it didnt bother him. Idealy I would probably use megadrum with the midi interface, it seems to carry a lot less problems.