Been trying to have a play with VNC so that I can use My linux machine from Windows.

The basic configuration appears to working correctly in that the server and client application are at least talking to each other, but I have a problem that appears in their FAQ as:

Q16 I connected to my Unix VNC server and I just see a grey desktop with a cursor.

After the vncserver script has started the Xvnc server, it then runs your ~/.vnc/xstartup script. By default this will try to start the twm window manager, but if twm isn't on your path, or if you prefer something else, you can edit xstartup. The log file may also give you clues about what is happening.

Which is all well and good, (the log file gives no clue btw) but I cannot figure out what the problem is, I have tried starting Gnome, TWM, KDE and one other environment that I forget the name of FMV/HMV/FMJ something like that.

Just to add salt into the wounds, If I run that xstartup script locally it does indeed fire up twm or kde etc, just not to a client app. Can anyone help a perplexed newbie?

The xstartup script is default currently though I have also tried entering the full path to some of the windows managers and so on, but I cant even get an error message in the log file to suggest what might be wrong.

Server and client are latest version and everything is using default config except xstartup current tries to launch KDE (only because it was the last one I tried).

OK, I set this up last night on a RH7.3 machine, so it should be close to your config.
Like you say the vncserver will run the ~/.vnc/xstartup script and from what is suggested in there start the WM. In my case xstartup looked for a file called "desktop", (I forget where it was). And all desktop had in it was Desktop = "". All I had to do was chuck KDE in the quotes, restart vncserver and there it was.
If that doesn't work, then break the xstartup script down to see what else it calls or what it defaults to, (probably FVM - your gray boring background WM). Keep on perservering, it will work with a little detective investigation.