Have found a 0.1uF cap and have put it over the pins, and have put the 100uF across the RESET and GND on UNO. But still getting the same issue. Not sure what setting the fuses means. But looking at it on Google, I'll need to buy a Crystal to set them.
So, I'll explain what I use and the process I followed.
I have an UNO R3, and program with IDE 1.0.3 on OS X. I'm trying to program ATMEGA328-PU not the pico (ATMEGA328P-PU).
My process is as follows:
1) Load the ArduinoISP sketch onto my UNO R3.
2) Close IDE
3) Unplug USB cable / Power Off Arduino
4) Change the signature in the avrdude.conf to 0x1e 0x95 0x14
5) Wire ATMEGA328-PU as follows:
1) Arduino 10 -> Chip 1(RESET PIN)
2) Arduino 11 -> Chip 17 (MOSI PIN)
3) Arduino 12 -> Chip 18 (MISO PIN)
4) Arduino 13 -> Chip 19 (SCK)
5) 0.1uF cap across Chip 7 (VCC) and Chip 8 (GND)
6) Arduino 5V to Chip 7 (VCC) and Chip 20 (AVCC)
7) Arduino GND to Chip 8 (GND) and Chip 22 (GND)

100uF cap across Arduino GND and Arduino RESET
6) Connect USB cable / Power On Arduino
7) Set programmer to Arduino as ISP

Burn bootloader
The verbose results are:
avrdude: Version 5.11, compiled on Sep 2 2011 at 18:52:52
Copyright (c) 2000-2005 Brian Dean, http://www.bdmicro.com/
Copyright (c) 2007-2009 Joerg Wunsch
System wide configuration file is "/Applications/Arduino.app/Contents/Resources/Java/hardware/tools/avr/etc/avrdude.conf"
User configuration file is "/Users/[REMOVED]/.avrduderc"
User configuration file does not exist or is not a regular file, skipping
Using Port : /dev/tty.usbmodemfa131
Using Programmer : stk500v1
Overriding Baud Rate : 19200
avrdude: Send: 0 [30] [20]
avrdude: Send: 0 [30] [20]
avrdude: Send: 0 [30] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [10]
AVR Part : ATMEGA328P
Chip Erase delay : 9000 us
PAGEL : PD7
BS2 : PC2
RESET disposition : dedicated
RETRY pulse : SCK
serial program mode : yes
parallel program mode : yes
Timeout : 200
StabDelay : 100
CmdexeDelay : 25
SyncLoops : 32
ByteDelay : 0
PollIndex : 3
PollValue : 0x53
Memory Detail :
Block Poll Page Polled
Memory Type Mode Delay Size Indx Paged Size Size #Pages MinW MaxW ReadBack
----------- ---- ----- ----- ---- ------ ------ ---- ------ ----- ----- ---------
eeprom 65 20 4 0 no 1024 4 0 3600 3600 0xff 0xff
Block Poll Page Polled
Memory Type Mode Delay Size Indx Paged Size Size #Pages MinW MaxW ReadBack
----------- ---- ----- ----- ---- ------ ------ ---- ------ ----- ----- ---------
flash 65 6 128 0 yes 32768 128 256 4500 4500 0xff 0xff
Block Poll Page Polled
Memory Type Mode Delay Size Indx Paged Size Size #Pages MinW MaxW ReadBack
----------- ---- ----- ----- ---- ------ ------ ---- ------ ----- ----- ---------
lfuse 0 0 0 0 no 1 0 0 4500 4500 0x00 0x00
Block Poll Page Polled
Memory Type Mode Delay Size Indx Paged Size Size #Pages MinW MaxW ReadBack
----------- ---- ----- ----- ---- ------ ------ ---- ------ ----- ----- ---------
hfuse 0 0 0 0 no 1 0 0 4500 4500 0x00 0x00
Block Poll Page Polled
Memory Type Mode Delay Size Indx Paged Size Size #Pages MinW MaxW ReadBack
----------- ---- ----- ----- ---- ------ ------ ---- ------ ----- ----- ---------
efuse 0 0 0 0 no 1 0 0 4500 4500 0x00 0x00
Block Poll Page Polled
Memory Type Mode Delay Size Indx Paged Size Size #Pages MinW MaxW ReadBack
----------- ---- ----- ----- ---- ------ ------ ---- ------ ----- ----- ---------
lock 0 0 0 0 no 1 0 0 4500 4500 0x00 0x00
Block Poll Page Polled
Memory Type Mode Delay Size Indx Paged Size Size #Pages MinW MaxW ReadBack
----------- ---- ----- ----- ---- ------ ------ ---- ------ ----- ----- ---------
calibration 0 0 0 0 no 1 0 0 0 0 0x00 0x00
Block Poll Page Polled
Memory Type Mode Delay Size Indx Paged Size Size #Pages MinW MaxW ReadBack
----------- ---- ----- ----- ---- ------ ------ ---- ------ ----- ----- ---------
signature 0 0 0 0 no 3 0 0 0 0 0x00 0x00
Programmer Type : STK500
Description : Atmel STK500 Version 1.x firmware
avrdude: Send: A [41] . [80] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [02]
avrdude: Recv: . [10]
avrdude: Send: A [41] . [81] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [01]
avrdude: Recv: . [10]
avrdude: Send: A [41] . [82] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [12]
avrdude: Recv: . [10]
avrdude: Send: A [41] . [98] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
Hardware Version: 2
Firmware Version: 1.18
Topcard : Unknown
avrdude: Send: A [41] . [84] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
avrdude: Send: A [41] . [85] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
avrdude: Send: A [41] . [86] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
avrdude: Send: A [41] . [87] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
avrdude: Send: A [41] . [89] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
Vtarget : 0.0 V
Varef : 0.0 V
Oscillator : Off
SCK period : 0.1 us
avrdude: Send: A [41] . [81] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [01]
avrdude: Recv: . [10]
avrdude: Send: A [41] . [82] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [12]
avrdude: Recv: . [10]
avrdude: Send: B [42] . [86] . [00] . [00] . [01] . [01] . [01] . [01] . [03] . [ff] . [ff] . [ff] . [ff] . [00] . [80] . [04] . [00] . [00] . [00] . [80] . [00] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [10]
avrdude: Send: E [45] . [05] . [04] . [d7] . [c2] . [00] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [10]
avrdude: Send: P [50] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [10]
avrdude: AVR device initialized and ready to accept instructions
Reading | avrdude: Send: V [56] 0 [30] . [00] . [00] . [00] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
avrdude: Send: V [56] 0 [30] . [00] . [01] . [00] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
################avrdude: Send: V [56] 0 [30] . [00] . [02] . [00] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [00]
avrdude: Recv: . [10]
################################## | 100% 0.06s
avrdude: Device signature = 0x000000
avrdude: Yikes! Invalid device signature.
Double check connections and try again, or use -F to override
this check.
avrdude: Send: Q [51] [20]
avrdude: Recv: . [14]
avrdude: Recv: . [10]
avrdude done. Thank you.
Hopefully this helps a little.