Just back from some further tests to find your mail Chris - thanks for the quick reply. However, seems I have started a wild goose chase.
I found restricted users on Win 2000 can use the custom RTM.
So then I created another restricted user on Win XP - and they could use the custom RTM too. Revert to the original restricted user and the problem re-appears. Log back in as the new restricted user and the problem clears once more.
Bottom line is that there appears to be an anomaly with the initial restricted user. I have no idea what, but don't have the time to chase it down. Sadly it will remain a mystery - and I hate those unexplained issues. But this is final testing and the budget is evaporating in the late evening sunshine. Everything else is working fine so it's time to let go and move on to the next thing.
I will take a look at those security settings on the file though Chris.