The Arduino is an easily-accessible platform for people to learn and build embedded microcontroller applications. It is based around the AVR family of microcontrollers. What the Arduino project did which is significant is produce an inexpensive easy to use development board (although there were several other good ones as well), standardize a nomenclature around access to the pins, and write a significant amount of support code and libraries to use them with minimal drama. I’ve been experimenting with microcontrollers for several years and although I was successful (see these projects) it was hard to build on other peoples results because of incompatibilities in naming conventions, build tools, etc.
It’s a tribute to the folks who developed the Arduino that this standardization enabled me to complete nearly a dozen ‘projects’ in a weekend - including the usual blinky lights, but also RF communication, accelerometer, matrix display, LCD display, and rgb PWM lights.
Although the Arduino ranges from $20-$35 (a bargain), some people such as Tim Willman have driven the price down even further by creating ‘minimal Arduino-compatible’ configurations. It turns out you really just need the AVR chip and a couple of wires and you’ve got something that works - almost. The challenge is that the build tools are not quite set up ‘off-the-shelf’ to work with these minimal configurations, because these alternate configurations run with the internal AVR oscillator at 8mhz rather than an external crystal/resonator at 16mhz to reduce parts cost. This is enough to prevent the Arduino app from completing successful serial configuration.

The recommendation from the various articles describing alternate Arduino configurations is to change targeting preferences in your preferences.txt in c:\Documents and Settings\
The second recommendation, to use the default Lilypad 8mhz configuration didn’t work for me either.
There’s a better (and supported) way to do this.
Here’s the changes you need to make to use the Arduino toolset with these minimal configurations - or indeed any other custom configuration. This is explained (a bit opaquely) here in the original Arduino documentation.
##############################################################
uduino.name=uDuino (ATmega8)
uduino.upload.protocol=stk500
uduino.upload.maximum_size=7168
uduino.upload.speed=9600
uduino.bootloader.low_fuses=0xdf
uduino.bootloader.high_fuses=0xca
uduino.bootloader.path=atmega8
uduino.bootloader.file=ATmegaBOOT.hex
uduino.bootloader.unlock_bits=0×3F
uduino.bootloader.lock_bits=0×0F
uduino.build.mcu=atmega8
uduino.build.f_cpu=8000000L
uduino.build.core=arduino
Note that it has a new prefix name, this must be unique in the file.
Note as well the changed lines from the previous atmega8 configuration that reduce the CPU speed from 16mhz to 8mhz, and the serial download speed from 19200 to 9600.
You can add as many configurations as you like, and this new ‘board’ will be accessible in the tools/board menu.

Good luck and enjoy your easy access to (even more) inexpensive Arduino/Freeduino configurations!
A last hint! I suggest that you mark your AVRs in some way to distinguish their various clock speeds and serial speeds.