Mike,
I changed the web config impersonation as above, i changed the home page from being a link to the WindowsSignin.aspx, i have tried to login various users with the LDAPBrowser software and had no issues.
SUCCESS! I have just run IISRESET from the command prompt and asked a domain user to login and they get their user name next to a logout link, and their details added to the database in the users table.
It still does not work for me though, is that because it's running on my XP workstation? i have tried logging in from other machines and it still does not work. If it's because i'm using my machine as a server, then it's not really an issue and i won't worry about it, although, it will be difficult to develop personalised modules(user's links etc) and test them locally. If you can fix this, great, if not, no worries.
All i really need to do now then is remove the logout/user name via skinning and i can provide my customer with personalisation from AD as required.