Hi Karl_b
thanks for that, tried what you said and added that line to boards but made not difference 
Deleted the boards from from my sketchbook location and appended the boards information to the boards.txt file in ...arduino-1.0\hardware\arduino (not sure that its good practice but ...)
This compiled 
so that was good news. But still was not uploading properly. So I compared the information with Attiny code that uses the arduino as ISP and noticed that "Atmega328 on breadboard" that this line "atmega328bb.upload.protocol=stk500" seemed strange to me so I replaced it with "atmega328bb.upload.using=arduino:arduinoisp", which is what we are doing.
This worked so I'm very happy with. So here is my boards information for AtMega328 on breadboard(8Mhz internal clock), thanks for you help Karl_b great to get jigwas together.
If anyone can see any problems with this let me know.
##############################################################
atmega328bb.name=ATmega328 on a breadboard (8 MHz internal clock)
atmega328bb.upload.using=arduino:arduinoisp
atmega328bb.upload.maximum_size=30720
atmega328bb.upload.speed=57600atmega328bb.bootloader.low_fuses=0xE2
atmega328bb.bootloader.high_fuses=0xDA
atmega328bb.bootloader.extended_fuses=0x05
atmega328bb.bootloader.path=arduino:atmega
atmega328bb.bootloader.file=ATmegaBOOT_168_atmega328_pro_8MHz.hex
atmega328bb.bootloader.unlock_bits=0x3F
atmega328bb.bootloader.lock_bits=0x0Fatmega328bb.build.mcu=atmega328p
atmega328bb.build.f_cpu=8000000L
atmega328bb.build.core=arduino:arduino
atmega328bb.build.variant=standard