This is a sketch that allows your Arduino to work as a STK500v1 programmer.
See the excellent Arduino as AVR ISP tutorial on arduino.cc.
Please report issues on the mega-isp site at code.google.com.
Use a recent version!
Arduino IDE 1.00 was released 30 November 2011
Check out latest available Arduino IDE from: http://code.google.com/p/arduino/downloads/list
If your Arduino IDE version is <= Arduino-0023:
The ArduinoISP that ships as an example with the Arduino software is old. You can download the ArduinoISP.ino here and replace the one you find in ...\arduino-002x\examples\ArduinoISP. This version is known to work with the avrdude that ships with Arduino-0023. That is an older version of avrdude (5.04, latest is 5.11).