just tonight i finally got my robot to work (i finished my exams just this morning, so i didn't have time before). i had the exact same problem you did. i would plug my AVR ISP MKII programmer into a usb port, then plug it into my robot, then turn my robot on. i also got a green light (two actually - one for the general 'power' symbol of the programmer, the other showed up when i plugged the robot in). when i tried to download the .hex file for 'zeroing' my servos, it wouldn't work!
The problem was two things. First of all, i had accidentally connected pins 3 and 4 (the pins labeled under MOSI and SCK, or the two middle pins) when i had soldered the robot together. And the second, which might be your problem: the ISP frequency was to low when i tried to program. After searching an hour on how to fix this problem i found where to fix it. When you go to program the robot, hit the little black chip shaped button named 'AVR'. go to: Main>settings. After you enter this box you can change the frequency. Change this to anything above 5 kHz, but below 1/4th of your robots operating frequencies...(i think the atmega8 usually runs at 1MHz but can run at 8MHz if you do something to it). Anyways, a list of common frequencies will be shown, i chose 6.478 kHz. Once you choose your frequency hit 'write', (i hit 'read' after also, not sure what that did). After i fixed these two problems, the program finally downloaded.