DrAzzy is more observant than me, since I didn't notice the lack of connecting of that reset line. You will need to connect that. The reset line on your USB2Serial adaptor goes to the reset pin on your board, also making use of the cap and resistor that DrAzzy mentioned. A serial bridge such as FTDI's FT232R has a DTR pin which would be wired the same way as you'll be wiring that Reset pin on your USB2Serial board - the cap and resistor thing.
Here's an explanation of how the bootloader works:
The bootloader allows the part to be programmed using the arduino IDE through the serial lines, in the typical way as with a USB cable connected to the arduino - the arduino has the converter on the board. Or with an adaptor such as you're using. The ISP uses the SPI pins. If you program either or both using the ISP, one will overwrite the other since the program will go where the bootloader usually goes. But if you program the bootloader and then the program through the serial pins, the bootloader won't be overwritten since the program will be written by the bootloader. If the only way you're going to program is using the ISP pins, then you really don't need the bootloader. Overall the bootloader and serial thing is easiest, so I'd suggest burning the bootloader first, and thereafter use only the USB2Serial adaptor to program you app code.
If you open up one of the bootloader files such as "optiboot.c" and it's associated files, or whatever loader your board uses, (they're somewhere in one of the folders with your arduino software installation), you'll see how it writes the program coming into RX, and provides feedback on what's going on by way of the TX (that's what you see below the code when writing the program as in verbose mode). You can even modify it and rebuild a new one if you want to do something special since the makefile and all is right there with it. The files are well documented and easy to work with.