If anyone is following this thread.

I found that my server could not be
on the same machine that the WP7 USB port was plugged into. 

Moved the
server software to another machine and it works fine. 

Not sure I
understand why.  When the phone is unplugged from the Server it works fine,
Plugged into the server using the USB cable and it will not make a connection. 
So now the success/failure chart looks like
this.

Emulator----->Success
Phone not connected to Computer via
USB----->Success
Phone using Debugger via USB; Socket to Local
Server----->Failure(Does not connect)
Phone using Debugger via
USB; Socket to Remote Server----->Success