I found the description here http://arduino.cc/en/Hacking/Programmer a bit confusing,
so I wrote a new how-to for using your arduino IDE to burn sketches with a hardware programmer
such as the USBtinyISP here: http://blog.lincomatic.com/?p=10
In the writeup, I show how to set up your IDE so that you can still burn sketches with a programmer.
Hope someone finds it useful.