I had it working with 3.2, but I decided to scrap it and upgrade to 3.5 so I'm thinking all the GPO's that I have in place shouldn't be interfering with LS.
On the server, in the web console, I click on VNC action item and the error I get now is 'no network provider accepted the given network path'
currently i'm running sfc /scannow and MS is ATTEMPTING to resolve this error, I'll let you know if this work.
thanks!