Figured it out the Airport Express was connecting fine. The XBOX however was expecting DHCP so I setup XMBC to a static IP.
The WRT54G is setup as 192.168.1.1 and I can access from XBMC my computer at 192.168.0.101.
It was really that simple. I turned off WRT54G DHCP service because I don't want it distributing anything. It's for very manual situations.
Does anyone know of a way to WDS Airport Express directly with the DIR-825. Alternatively is there a Wireless N network extender device that has an Ethernet out port on it, that might be a good solution for connecting my Xbox 360 downstairs.
Thanks, Nick