to make simple without referring to the small board you have, just looking at the Arduino and the sparkfun m168.
The original m168 chip works good with all sketches in the Arduino - correct?
None of the Sparkfun chips will your complex sketch in the Arduino?
You mention the Sparkfun m168 will "run the blink sketch while outputting messages to the LCD" - what messages are you writing to the LCD? If you are writing things to the LCD it seems like it should be working, but you say the Sparkfun m168 does not run your sketch? Yet the Arduino m168 runs this sketch just fine?
Ken H>