One feature we wanted was the auto reset feature of the newer Arduino's, so we don't have to push the reset button when uploading a sketch.
We also wanted an easy way to connect and disconnect the interface, so it can be used with other boards we build, avoiding the cost of having to have multiple interfaces. By putting a header on the Arduino board, this adapter just plugs right in when a code change is necessary.
A .1 uf capacitor connects RTS to pin 1 on the Atmel chip. Opposite to convention, RX on the FTDI connects to RX on the Atmel (Pin 2), and TX on the FTDI connects to TX on the Atmel (Pin 3)!
When uploading sketches, pick Arduino Duemilanove w/ ATmega328 as your board.