Old boards, new chips...

Hi!

I was wanting to know if I can take the old (atmega8?) chip from my three year old Arduino board and replace it with a modern chip.

Yes, you can, it is the same.

Thanks! So, I can just use the setting 'Arduino NG or older w/ Atmega168'.

Great! That's a lot cheaper than buying a new board!

Careful, you'll have to put the bootloader on the chip, you can't just plug a blank chip you ordered and upload a sketch to it without the bootloader.
Look in the playground for the FTDI bit-bang mode, it's one of the easiest way (no need to buy extra hardware) to do this.