Ok, think I've discovered what the problem is:
Linkstation Live 1TB
* This uses twonky as it's default Upnp server and this support FLAC.
Linkstation Pro 2TB
* This uses firefly, mt-daapd, as it's default Upnp server and this does not support FLAC !
Sheesh, guess I'll be returning this box now then. This is a shame and it does seem very strange to have the newer, bigger, faster box not support functionality that the slower older box can do.
Roy.