Ok, so I found this: Arduino Diecimila and the Atmega168: AVRISP MKII Frustration and Workaround
Here's the summary.
"This is the workaround I've found:
Attemping to upload your code to the Arduino board does not work, but it does generate the .hex file for your code! The .hex file is saved in the "applet" folder in your sketch folder (the Arduino IDE creates an applet folder the first time you attempt to upload your sketch; each sketch has its own applet folder).
- Work on your code in the Arduino interface.
- When you are ready to upload, attempt an upload. This generates the .hex file. (You don't need to connect the Arduino board to attempt the upload).
- From AVR Studio, program the Atmega168 (using the connections described above). On the "program" tab, in the "Flash" box, browse to the .hex file you just created. (You only need to do this once. The program tab points at the .hex file, so each time you update the .hex file in the previous step, just click the "Start" button in the Auto tab, or the "Program" button in the Program tab to program the device.)"
I will hopefully try this tonight and see what happens.