OK, I'm learning.
Set the fuses to:
avrdude -c usbtiny -B 16 -p m328p -U lfuse:w:0xFF:m -U hfuse:w:0xDE:m -U efuse:w:0x05:m
And the LED blinks at the proper rate, using my external 16MHz crystal.
Still need any input on my issue using Arduino IDE through the FT232R.
Thanks