The address encoded here is 0x1C00. This looks strange to me since the fuse bytes define that the bootload starts at 0xE00 (BOOTSZ set to 0x01)?
I don't know how the bootloader works either (I have almost no knowledge about microcontroller programming), but I can confirm that you figured out the fuse bytes correctly (you indeed have to set it to 1k code size, starting at 0xE00) and that the bootloader as included in Arduino 0004 works if you burn it onto an out-of-the-box atmega8. I burned it onto several controllers (usuing AVRstudio on Windows though, since I couldn't get the avrispII to work on the Mac yet).
I hope that helps.