It appears you have a messed up reset circuit. You have a cap from pin 1 to pin 3? That cap should go between pin 1 and whatever pin is the DTR signal on the FTDI module. That allows the arduino IDE software to generate a auto-reset function required before a upload can take place. Otherwise you need to remove the cap and properly wire in a reset switch, which you then have to press and release at just the correct time. Auto-reset is the way to go as I'm sure that your FTDI module provides the DTR signal.
oh right. Im an idiot. I changed the board but I still get the same error message... Does that mean my FT232R is blown? I am choosing Arduino Duemilanove or Nano w/ ATmega328 under Tools/Board. Attached is a new pic with the cap moved. Have I anything else messed up?