CrossRoads:
You need some decoupling caps on the VCC/AVCC pins.
You also need to connect FTDI's input pin CTS to Gnd so it knows the chips is waiting for data.
Why do you say that is a requirement? I note that on a Duemilanove schematic the FTDI CTS pin just goes to a floating pad. I think only if the arduino IDE requested to the PC FTDI USB software driver to use hardware handshaking would you have to deal with the CTS pin on the FTDI chip.
Lefty