After spending all night discovering what a nightmare ralink wireless has become on linux I felt I should report what I found...
On vanilla 126.96.36.199 hostapd gives lots of
[code198dlqzk]MGMT (TX Callback) Fail[/code198dlqzk]
And I cant see the AP from another machine. There are "Sent probe request for broadcast SSID" messages too, so it looks like it's half working.
I've read about this happening on some 2.6.26 kernels, but I picked one at random (vanilla 188.8.131.52), applied the same patches as before - linux/net/mac80211 whatever - to enable master mode and it worked first time. I can see it, connect to it, all is good.
[code198dlqzk]01:00.0 Network controller: RaLink RT2500 802.11g Cardbus/mini-PCI (rev 01)
Subsystem: RaLink Unknown device 2560
It's an Edimax. The hostapd config is based on the example, no encryption or anything (I was just trying to get it working). Hostapd is the recommended version, and it's a 64 bit kernel build.
Hope this helps in some vague way.