@sid,
Look up this link below, it discusses the problem you face in great detail. and our friend sUlPhUr|nE 's advice included.
*www.mredkj.com/tutorials/tips_ie.html
additionally, the article suggest looking up the MS KB:
# Q154168 Cannot View Source in Internet Explorer.
Solution: Notepad needs to be installed.
# Q179829 Cannot View HTML Source Code for Web Pages in Internet Explorer
Solution: Specify a valid path for the TMP environment variable.
# Q203592 Cannot View Source Code for Web Pages
Solution: Include the Change permission for the Cookies folder.
# Q306907 Source Code Is Not Displayed When You Click Source on the View Menu in Internet Explorer
Solution: Delete Temporary Internet files