Using 8 Mhz internal clock.

Programmer Arduino with 328
Target 168 same results with 8.

Power up:
The three led on the programmer Arduino flicker in sequence, 1, 2, 3 then the heart beat fades ON and OFF regularly.

Target connected:
Target Arduino power LED lights.

Correct board type / processor selected from TOOLS menu

Attempt to burn bootloader:
PROG LED flashes once and simultaneously the pin 13 LED of the target flashes once. The error message appears on the PC and the heart beat LED resumes fading ON and OFF.

The target Arduino board has had the FTDI chip forcibly removed duting an accident but other than that still runs a pre programmed sketch. Other than that I cant think of anything else I may have done / omitted.