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Am I correct in assuming that this chip is toast?
No. As long as you get any results at all, the chip runs. Also, ATmegas are pretty hard to destroy, even attaching 12V to an I/O pin destroys only that pin.
avrdude: verification error, first mismatch at byte 0x1f800
0x1f800 = 126k = 128k - 2k, right? That's the first byte of the bootlader its self, so a failure to write this byte is expected. The Sanguino bootloader is 4k in size, so only 124k are available for the firmware.
You firmware is simply too big for this chip.