HMM, it gets weirder and weirder.
I down loaded arduino-0023, made no changes to the port or hardware or preferences file and it works perfectly.
So, I renamed the avr directory in ...\arduino-1.0\hardware\tools and then copied the avr directory from ...\arduino-0023\hardware\tools directory into the ...\arduino-1.0\hardware\tools directory, and it works fine.
Conclusion, the issue is with the new version of avrdude.