I see where you are coming from. So I'm guessing I need to obtain an external oscillator and reprogram the high fuses or erase the device?
I'm not sure, CKOPT just adds a capacitor to ground for doing an external RC osc. It may still work with it enabled.
I've not used Arduinos before, only raw AVRs with avrdude. So i'm not sure exactly how the arduino ide fits into things but..
I can't see it ever working until avrdude finds the correct signature.
From your post on the previous page we can see it's finding the programmer mcu and not the ATMega8.
So there must be a setting wrong somewhere.
However.
avrdude: verification error, first mismatch at byte 0x00c0
0x64 != 0x60
avrdude: verification error; content mismatch
This text you posted indicates that the programming has actually started but has encountering a mismatch error. Which would indicate that the signature was correct (or it wouldn't have started)
So i'm quite confused.
But if i had to guess i'd say your ATmega8 is still ok and running off the internal RC oscillator correctly.
If a clock fuse had been set wrong and the RC osc stopped working you wouldn't be getting mismatch errors.