Uploading "blink" to external ATMEGA386P-AU with Arduino Uno R3 (beginner, getting started help)

Thanks, Deltaflyer - appreciate the help and am more than happy to provide any further clarification or information you (or anyone) would like to see!

I've attached a diagram of my test set-up:

I am not married to the 20 MHz crystal frequency at this stage - I would just like to demonstrate that i can push code into the SMD part (hence why I chose Blink application.) I've not tried re-configuring the Fuse settings - they reflect the state of the IC as it came from the distributor.

Since my initial posting, I've been able to use AVRDUDESS "detect" function to tell the difference of whether the external CPU is attached:

: avrdude -u -c avrisp -P COM3 -b 19200 -F -p m8
Detected 1e950f = ATmega328P

or if the external CPU is not attached:

: avrdude -u -c avrisp -P COM3 -b 19200 -F -p m8
ERROR: Unknown signature 000000

I exported my copy of Blink (I call blink2, which has the time delays reset to 100 mS) and found two HEX files generated (one with, one without bootloader) - for a stand-alone application like this, do I choose with, or without bootloader? I chose without.

I uploaded the "blink2" version using AVRDUDESS (but did not change the Fuse settings so far); I also retrieved the fuse settings and these appear to have retrieved properly when the external CPU is attached. These are all show in the screen shot of AVRDUDESS below.

PROBLEM:

Here is a point of real confusion -- when I have the external CPU attached, after uploading BLINK2, the LED ON THE ARDUINO UNO R3 ends up flashing (at the ~10 Hz rate I chose, as I modified the timer values.) The corresponding pin (11) on the SMD part is not toggling (that pin is at 0V).

Does this (blinking LED on the Arduino Uno R3 board when the external CPU is attached via ICSP) instead of toggling the pin on my target CPU) suggest that AVRDUDESS is writing to and reading from the ATMEGA38P-PU DIP part on the Arduino Uno R3 board, instead of the external CPU ATMEGA386P-AU connected via the ICSP pins as shown in the diagram above?

If I remove the external CPU and run the Arduino Uno R3 only (which I think should only have ArduinoISP firmware at this point), the LED on the Uno blinks 3 times at power up (at the same ~10 Hz rate), then stays on steady. This has my REALLY puzzled!

Thanks very much for any further help through this!

Dave