IE8 No options on tools menu

It sounds like the Control Panel Internet Options file has been corrupted.  You could try replacing it from another XP pc, or else expanding the compressed copy from your XP installation CD.  The file involved is called INETCPL.CPL, which is in the Windows\System32 folder.  From your XP CD, you would use this command:

EXPAND  D:\i386\inetcpl.cp_  C:\Windows\System32

the C:\windows\system32 folder contains a file INECPL (without the .cpl).  Double clicking on it brings up the internet options so I think it is there OK but when I try and open it from the tools menu it closes immediately.

You have file extensions showing in Explorer?  (You need to start Windows Explorer, click on Tools menu, select Folder Options, then the View tab and put a dot next to Show hidden files and folders, and remove the check mark next to Hide protected Operating System files (recommended.)  It's also a good idea to remove the check mark next to Hide extensions for known file types.)  It should be INETCPL.CPL, not INECPL.  If that is the real name you have, then file corruption or a virus or something changed the name.  You can also just rename it and maybe your problem will go away.

Yes I have file extension showing.  Tried a rename with no result apart from it seemed to remake the original inetcpl file by itself.  The file I renamed I have now to call inetcpl1 otherwise there would be two files with same name.   Double clicking on inetcpl file still brings up options menu but still not available via IE

The registry and/or code in Windows should be set up to reference that file with a file extension of .CPL.  Have you tried that?

I renamed the file from inetcpl to  inetcpl.cpl.  The same result with IE8 and double clicking on the renamed file did not do anything while double clicking on inetcpl brought up the options free standing(IE without IE8 running)  I dont think IE8 is seeing this file as I the favorites menu is still showing all favorites and not just those in use.

chilter--This often can be because of a restriction in the GPO or the Registry.  Though the fact that you can access it in Control Panel is a little strange.
Some ideas here  http://en.kioskea.net/forum/affich-34358-tools-internet-options
http://www.astahost.com/info.php/how-remove-internet-options-features_t7435.html  (you would want to be sure these restrictions are not in place on your PC--in other words you want the reverse result)

chilter--Did you see the post from vizskywalker in the astahost link?  A new key is suggested.